US AI Stocks Tumble After Chinese AI Model Emerges

Key Highlights:

* Chinese startup DeepSeek releases cost-effective AI model, raising concerns about Western AI infrastructure spending.
* Nvidia (NVDA) falls 15%, losing billions in market cap, while AMD drops 5% and Broadcom (AVGO) plunges over 13%.
* Analysts question the necessity of heavy investments in US data centers with the advent of more efficient AI models.

Impact on US AI Sector

The emergence of DeepSeek's generative AI model, R1, has sent shockwaves through the US AI sector. Analysts note that DeepSeek's models offer comparable performance to Western AI platforms at a fraction of the cost, casting doubt on the viability of current AI infrastructure investments.

"The performance of the DeepSeek models developed in China may have a very profound impact on the US AI companies," opined DA Davidson analyst Gil Luria. "The models from DeepSeek are performing as well as the most advanced models developed in the US at a small fraction of the price."

Market Reaction

The news has triggered a sell-off in US AI stocks. Nvidia has lost hundreds of billions in market capitalization, while AMD and Broadcom have also seen significant declines. The broader markets have also reacted negatively, with the S&P 500 and Nasdaq both losing ground.

Industry Outlook

Analysts predict that the DeepSeek news could lead to reduced spending on AI infrastructure by major US companies. If organizations can run AI models with reduced computing demands, they may not require massive data centers filled with expensive GPUs.

"We think heightened risks may cause multiples for leading edge chipmakers to compress, with those most at risk being NVDA, MRVL, AVGO, AMD, and MU," said CFRA analyst Angelo Zino.

However, some analysts remain skeptical about the potential impact of DeepSeek. Bernstein's Stacy Rasgon suggests that the company's reported training costs may be underestimated. William Stein of Truist Securities also expresses caution, noting the difficulty in verifying DeepSeek's claims about its training process.

Earnings Season

The DeepSeek buzz comes as Big Tech earnings season kicks off, with Microsoft, Meta, and Tesla scheduled to report earnings this week. Investors will be closely watching these companies' updates for any signs of altered AI investment plans in light of the latest developments.