Chinese AI Startup DeepSeek Sparks Investor Reevaluation
The rise of DeepSeek, a Chinese AI startup, is prompting investors to reconsider the potential of leading internet companies in China to capitalize on the transformative power of artificial intelligence.
AI Model as a Game-Changer
Market analysts believe the AI model developed by DeepSeek will revolutionize Chinese tech companies and their stocks, which have faced pressures due to economic concerns. Alibaba Group Holding Ltd. shares surged last week amid the hype, pushing a benchmark tech stock index into a bull market.
DeepSeeks Impact
"This heightened attention could shift investor focus from risk aversion to potential opportunities in large Chinese internet stocks," said Jian Shi Cortesi, a portfolio manager at Gam Investment Management. "It's positive given the significant valuation gap between these stocks and their US counterparts."
The upcoming earnings season may provide catalysts for stock growth based on management commentary on AI progress and cloud service demand. Meanwhile, options traders have increased bets on Chinese tech stocks, which remain historically undervalued.
Multiples and International Interest
Multiples for China's tech stocks have been suppressed by weak domestic demand and intense competition in e-commerce and cloud businesses. Geopolitical tensions with the US have also dampened global appetite for these stocks.
"Lack of foreign investor interest and liquidity in the market made it a value trap," said Alex Au, managing director at Alphalex Capital Management HK Ltd. "DeepSeek has reignited international investor interest in Chinese tech and should help close the valuation gap."
Alibaba and Competition
Alibaba has presented the latest version of its AI model within days of DeepSeek's launch, claiming even superior results. This has fueled a 13% surge in its Hong Kong-listed shares last week. Tencent Holdings Ltd., Baidu Inc., and ByteDance Ltd. have also introduced competing AI offerings.
Boon for Hyperscalers
The new AI models are expected to accelerate adoption in both enterprise and consumer sectors, while reducing costs for hyperscalers. Cloud service providers like Alibaba and Tencent will benefit as users rely on cloud computing for AI infrastructure.
"DeepSeek's more affordable and capable model should democratize AI in China, encouraging usage and investment," said Alphalex Capital's Au. "We believe Alibaba, a leading cloud operator, will be a major beneficiary."
Lagging Cloud Growth
Chinese hyperscalers have lagged their US peers in cloud business growth. Analysts estimate Alibaba's December quarter cloud revenue grew by 9.7%, and Baidu's by 7.6%, compared to Amazon.com Inc.'s 19% and Microsoft Corp.'s 31%.
Headwinds and Opportunities
Chinese tech stocks still face challenges from US tariffs on e-commerce and restrictions on access to advanced chips. However, DeepSeek has highlighted that the focus is not solely on the most advanced technologies. Options bets on the Hang Seng Tech Index are on the rise, indicating renewed optimism.
"There has been a disappointing investment story for Tencent and Alibaba for years," said Richard Clode, a portfolio manager at Janus Henderson. "We now have a credible player in AI to excite investors."