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BREAKING NEWS: Nvidia Crashes 16% on Chinese AI Breakthrough (DeepSeek)

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January 27, 2025

TLDR: Trillion-dollar market sell-off initiated by Chinese AI startup DeepSeek. Ripple effects discussed: DeepSeek's cost-efficient model, pressure on big tech to adapt, and geopolitical stakes in US-China AI race. Discussion focuses on altered dynamics of the AI race and US stock market.

1Ask AI

In this episode of the Market Maker Podcast, hosts Anthony and Piers delve into the monumental news that has rocked the markets, particularly striking a blow to Nvidia's stock, which plummeted by 16% following a significant AI advancement from the Chinese startup DeepSeek. This episode unpacks the implications of this development on the tech industry, specifically on the investment dynamics and strategies of major tech firms.

Key Highlights

1. Nvidia's Sudden Decline

  • Nvidia's stock experienced an immediate drop of approximately 12%, opening below a crucial phase of market consolidation.
  • Comparatively, other tech giants like Microsoft and Google saw their stock prices decline by 4.4% and 3.5%, respectively.
  • The prompt sell-off in the Nasdaq 100, down about 5% initially, underscores the market’s reaction to the news.

2. The DeepSeek Breakthrough

  • DeepSeek, a new player from China, unveiled a detailed paper showcasing a large language model that can self-learn efficiently without the exorbitant costs associated with major AI infrastructures.
  • This innovation challenges the prevalent notion that only tech giants can afford the computational power necessary for AI model training, primarily supplied by Nvidia.
  • DeepSeek's development suggests they can enter the AI race at a fraction of the cost, potentially disrupting the market where Nvidia and its ilk had previously dominated.

3. Implications for Big Tech

  • Major companies like Meta and Microsoft have announced substantial investments in AI infrastructure (up to $80 billion by Microsoft in 2025). That huge spending could now be seen as unnecessary in light of DeepSeek's revelations.
  • The narrative that vast financial investments translate to market leadership is shifting as DeepSeek's cost-efficient model contests this assumption.
  • This development signals a potential reevaluation of budgets across big tech firms, who might reconsider their massive spending on AI technologies.

4. The Geopolitical Angle

  • The episode discusses the implications for US-China relations amidst the growing AI arms race, especially after recent US restrictions on chip exports to China.
  • The timing of DeepSeek’s announcement, near the Chinese New Year amidst reports of a faltering Chinese economy, showcases a strategic move that could bolster national pride.

Market Reactions

  • The episode notes a surge in trading volume, with 200,000 NASDAQ 100 futures contracts traded, indicating a frantic response from traders to adjust their positions.
  • Companies within the supply chain for AI, particularly chip manufacturers, are experiencing significant losses. For instance, Siemens Energy dropped 22% and Schneider Electric by 9.2% due to likely reduced demand for expensive chips.
  • Conversely, Apple’s stock rose by 1.6% as they have not insisted on major AI spending, positioning the company uniquely in the current market environment.

Earnings Season Outlook

  • With several major companies scheduled to discuss earnings shortly, there are expectations about how they will address these new developments during their analyst calls.
  • Notably, Microsoft and Meta will face heightened scrutiny over their large-scale investments in AI compared to the framework established by DeepSeek.

Conclusion

In summary, the emergence of DeepSeek's cost-efficient technology represents a critical juncture in the AI landscape, challenging how major firms approach AI investments. The podcast encourages listeners to monitor the evolving narratives and strategies within big tech as they react to the stated advancements. This crisis may not only signify a turning point for Nvidia but also prompt a broader reconsideration of business models in AI development, impacting the economic health of the tech industry as a whole.

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