The success of an open-source AI model, DeepSeek, created by a Chinese startup, caused significant declines in major tech stocks, including Nvidia, Microsoft, and Meta.
The release of an open-source AI model DeepSeek-R1 by the China-based DeepSeek startup has intensified discussions about the global AI race and its implications for technology investments, sinking the shares of global tech leaders.
The new AI tool is advertised as a rival to OpenAI’s advanced o1 model, which powers the latest ChatGPT version. OpenAI’s state-of-the-art technology has enhanced reasoning capabilities along with extended internal chains of thought before delivering a response. These qualities empower the AI model to better solve complex problems related to challenging subjects such as science, coding, and mathematics.
DeepSeek-R1 claims to outperform some of the key technical characteristics of the existing AI products offered by U.S.-based companies, such as Llama 3.1 by Meta, Claude 3.5 by Anthropic, and GPT 4o.
At the same time, the Chinese startup aims to deliver the same or even superior AI capabilities at lower cost, primarily by utilising less expensive chips. The new AI system developed at a fraction of the typical cost has already beaten the ChatGPT downloads in the U.S. on the Apple App Store.
DeepSeek’s sudden surge in popularity caused chaos in the global tech market. Investors started reassessing the competitive landscape in artificial intelligence as well as their own expectations that AI would drive sophisticated chip demand, raising questions about the sustainability of U.S. leadership in AI.
The stocks of major tech firms, which saw recent growth mainly due to AI developments, experienced a sharp decline. Thus, Nvidia stock, which heavily relies on AI chip sales, dropped more than 11% in a day, while all the major tech players, including Microsoft, Alphabet, Meta, Amazon and Tesla, were all down 2% or more in early trading. Broadcom, another significant AI industry player, was down more than 12%. The decline also influenced the main U.S. stock indexes.
The downward market trend is another example of how sceptical media headlines can instantly affect and reverse investor sentiment. The havoc indicates that markets can be highly sensitive to new developments, especially when they challenge existing expectations. For instance, today, investors were caught off guard by DeepSeek’s cost-effective AI approach, questioning the viability of the AI investment model they know.
The immediate sell-off reminds us that innovative tech stocks are still volatile and subject to swift market reactions to news and black swan events such as regulatory changes, technological breakthroughs, or competition. Media narratives regarding tech disruptions can quickly fuel investor anxiety or optimism and cause rapid price fluctuations.
