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The low-cost development of DeepSeek R1 has raised questions on huge investments made so far in the AI domain and the return on capital on them.
With DeepSeek making a headline, Nvidia’s shares on Monday dropped 16.86 per cent to $118.58 apiece on the BSE, wiping out nearly $600 billion from market value.
Even as Chinese low-cost generative AI model DeepSeek R1 has emerged, AI stocks are in panic with market leader Nvidia declining by nearly 17 per cent losing about 600 Billion of its market value within few hours. Why are global AI stocks witnessing a freefall in their prices following DeepSeek R1? Know the competition imposed by DeepSeek against incumbents like ChatGPT, Google and Microsoft.
About two years ago when US-based OpenAI unveiled its chatbot model, it sent ripples across the world about the changing tech dynamics and how AI can become the next big thing. Investors started pouring in billions of dollars across supply chain of AI with semiconductor machinery maker ASML, AI chip designer Nvidia, and chip maker TSMC receiving huge gain in their valuation amid increased funding and prospects.
In 2017, SoftBank’s Vision Fund acquired a stake of around 4.9 per cent in Nvidia, which made it one of the largest shareholders in the company. However, by early 2019, SoftBank began to divest its stake in Nvidia. The stake was then worth around $4 billion, but would today have been valued around $160 billion.
Microsoft invested over $13 billion in OpenAI, the developer of ChatGPT, and continues to expand its AI capabilities across its product suite. Amazon committed to investing up to $4 billion in Anthropic, an AI safety and research company, to enhance its AI offerings. Apart from this, Google and and Meta have also invested heavily in billions of dollars in the domain.
Investors like SoftBank Group, Thrive Capital and Intel Capital also bet big on the AI sector.
How Does DeepSeek Pose A Serious Competition?
Though investors and Big Tech globally were pumping in a huge amount of funding in the AI domain, a small Chinese AI start-up DeepSeek has made a headline by creating a state-of-the-art reasoning model DeepSeek R1 within just two month using “just” $5.6 million.
DeepSeek R1, launched earlier this month, aims to augment reasoning and analytical capabilities, positioning it as a formidable contender to other prominent AI models such as OpenAI’s o1 and ChatGPT.
One of the notable features of DeepSeek R1 is its cost-effectiveness. In contrast to OpenAI’s o1, which charges $15 per million input tokens and $60 per million output tokens, DeepSeek R1 offers a substantially lower price at $0.55 per million input tokens and $2.19 per million output tokens.
In terms of performance, DeepSeek R1 has demonstrated comparable results to OpenAI’s o1 across various benchmarks, including mathematics, coding, and reasoning tasks. Notably, it even outperforms OpenAI’s o1 in certain areas, such as coding tasks, where it achieves a remarkable 97% success rate.
Headquartered in Hangzhou, China, the company was established in July 2023 by Liang Wenfeng, a Zhejiang University graduate specialising in information and electronic engineering, according to a report by MIT Technology Review.
DeepSeek R1: Why Is It Spooking Markets Globally, Mainly AI Stocks?
The low-cost development of DeepSeek R1 has raised questions on huge investments made so far in the AI domain and the return on capital on them.
Nvidia’s shares on Monday dropped 16.86 per cent to $118.58 apiece on the BSE, wiping out nearly $600 billion from market value. The Nasdaq Composite Index dropped 3.1%, while the S&P 500 fell 1.5%.
Chris Wood of Jefferies wrote in his latest GREED & fear note, “With the DeepSeek development GREED & fear will, ahead of the pending Chinese New Year, reduce holdings in the AI picks and shovels plays in the various portfolios precisely because of the potentially dramatic implications of the DeepSeek news.”
Speaking about the meltdown seen in big tech names like Nvidia, Wood said GREED & fear has had no exposure to these “hyperscaler” names in the global portfolio. However, they are part of the AI “picks and shovels” theme since April 2023.
Perplexity CEO Aravind Srinivas in a post on X said, “DeepSeek has effectively replicated o1-mini and made it open source.”
Satya Nadella, CEO of Microsoft, said, “I think we should take the development out of China very, very seriously.”
OpenAI CEO Sam Altman called Chinese startup DeepSeek’s R1 AI model “impressive” on Monday, but emphasized that OpenAI believes greater computing power was key to their own success.
“DeepSeek’s r1 is an impressive model, particularly around what they’re able to deliver for the price. But mostly we are excited to continue to execute on our research roadmap and believe more compute is more important now than ever before to succeed at our mission,” Altman said on X.
