DeepSeek's R1 AI model shocks the market, causing significant tech stock selloffs and valuation concerns.
Sectors & Industries
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DeepSeek, a little-known Chinese AI startup, sent shockwaves through global markets after its AI model, R1, became the most downloaded app on Apple's App Store last week. The unexpected surge in popularity sparked a tech sector selloff, with Nvidia losing $593 billion in market value—the largest single-day drop for any company in Wall Street history. The futures market reacted swiftly Jan. 26th, with the Nasdaq sliding over -3% as traders scrambled to assess the implications of a low-cost AI model disrupting the industry’s existing economic order.
The collapse in tech stocks reflected deep fears about the sustainability of the AI boom. Until now, AI dominance was assumed to be directly tied to chip capacity and massive R&D spending. DeepSeek’s rise challenges this narrative, raising questions about the necessity of major infrastructure investments by META, Google, Microsoft and Oracle. With the Nasdaq already overexposed to AI-driven valuations, investors dumped shares of Nvidia, Broadcom, and Microsoft, triggering a broader risk-off sentiment. Meanwhile, Beijing celebrated the development as a sign of China’s resilience in AI innovation despite U.S. chip sanctions which forces Chinese companies to develop products without access to Nvidia's top performing processing chips.
DeepSeek’s rapid ascent isn’t just about technical performance—it’s a wake-up call about AI economics. The company claims it built R1 using just 2,048 Nvidia H800 GPUs, at a fraction of the expense that industry leaders like OpenAI and Google have spent. The implication is profound: if DeepSeek’s model rivals or even outperforms ChatGPT and Gemini, then U.S. tech giants may have been overspending, raising concerns about efficiency in AI development. Likewise, if much cheaper processing is possible, there's less need for all the power demands being projected which have triggered astronomical gains for nuclear startups with no revenue, like NuScale (SMR) and Oklo, as well as for nuclear-heavy utilities like Constellation Energy (CEG) and Vistra (VST), which have seen their share prices rise dramatically on projected energy demand from AI-supportive data centers. These stocks all dropped substantially early last week due to fears their services and products would be far less valuable than previously though.
Skepticism in DeepSeek's figures is taking root. Some industry insiders argue that DeepSeek’s claim of building a top-tier AI model with minimal resources is misleading. Reports indicate that DeepSeek may have secretly acquired tens of thousands of Nvidia chips before U.S. export controls tightened, meaning its supposed cost advantage may not be as dramatic as advertised. Additionally, critics suspect DeepSeek benefited from China's government-backed infrastructure, which isn’t accounted for in its cost estimates. If the company is concealing a larger dependency on Nvidia hardware, the AI sector’s cost paradigm may not be as disrupted as the selloff suggests.
Other analysts have argued that even if DeepSeek did pull off the technological marvel it claims to have done, there's not a long line of businesses willing to provide proprietary business information to a Chinese tech firm - especially one that is regulated and directly influenced by the Chinese government. This influence can be seen by the chat with DeepSeek below.
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