DeepSeek's AI Breakthrough Sends Shockwaves Through US Tech Stocks

Overnight, US tech stocks (-1.46%) and the Nasdaq (-3,07%) experienced a sharp decline, with investors unnerved by concerns over inflated AI company valuations. The trigger? DeepSeek, a Chinese-based AI company that has seemingly made a significant breakthrough in artificial intelligence capabilities. The company’s launch late last week has forced a recalibration of market expectations, injecting fresh volatility into the already dynamic tech sector.

ANZ’s Mahjabeen Zaman, Head of FX Research based in London, remarked:

“Markets are now questioning investment case for large U.S tech companies given that their business models pretty much rely on billions of dollars of investment spend. Our viewers, it remains too soon to tell whether this development will derail the AI investment Trend. But what It does, is, it does inject a lot of near-term volatility.”

This development highlights the evolving rivalry between American and Chinese AI companies. For years, US firms like OpenAI, Microsoft, and Google have dominated the space, leveraging billion-dollar R&D budgets. However, China's approach—leaner, more cost-efficient, and apparently equally innovative—is beginning to challenge the cost-effectiveness and long-term viability of traditional AI business models.

The excitement over DeepSeek isn’t limited to finance media commentators. AI developers have also joined the conversation, emphasizing the platform’s potential. Many have praised it as a groundbreaking tool that offers near-unrestricted flexibility for AI innovation at minimal cost.

The buzz has been particularly evident among developers, many of whom have shared their experiences using the platform. Online blogger and developer Riley Brown expressed his enthusiasm about how he managed to build a Perplexity-style clone using Cursor in just 25 minutes, without writing a single line of code.

Another user, FrankDeGods, shared similar excitement, stating:

“I’ve been using DeepSeek for 20 minutes but I’m pretty sure this is the best thing in AI since the original ChatGPT.”

Amid this wave of praise, Nvidia has publicly acknowledged the significance of DeepSeek's advancements, even as the platform’s rise negatively affected Nvidia’s market performance. On Monday, Nvidia’s stock plunged 17%, with further losses bringing the total decline to 18% by the day’s end. Addressing the situation, Nvidia issued the following statement:

“DeepSeek is an excellent AI advancement and a perfect example of Test Time Scaling. DeepSeek’s work illustrates how new models can be created using that technique, leveraging widely-available models and compute that is fully export control compliant. Inference requires significant numbers of NVIDIA GPUs and high-performance networking. We now have three scaling laws: pre-training and post-training, which continue, and new test-time scaling.”

These developments are prompting investors to reassess the long-term growth potential of US tech giants, particularly those heavily reliant on capital-intensive AI projects. With pricing pressures mounting amid heightened competition, market confidence in the sector's profitability is being tested.

It remains uncertain whether this development will fundamentally alter the trajectory of AI investments, but DeepSeek's emergence has undeniably shaken the sector in the short term.

With the growing competition between the US and China, AI continues to dominate market narratives. Investors should brace for ongoing disruptions as the landscape rapidly transforms.