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DeepSeek deep sixes stocks

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January 27, 2025

TLDR: AI stocks rose due to a China app challenging cost and demand assumptions; bond and cash were moved to safety as analysts predicted further economic volatility

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In the recent episode of the Seeking Alpha podcast titled DeepSeek Deep Sixes Stocks, host Kim Kong delved into the impact of the newly released self-learning AI model, DeepSeek R1, and how it has disrupted perceptions surrounding AI stocks. Here’s a comprehensive breakdown of the key discussions and insights shared in the episode.

Introduction to DeepSeek

  • What is DeepSeek?
    DeepSeek is a self-learning AI model developed by a Chinese AI lab, Hyperion, that claims to operate with significantly lower costs compared to existing models. It has sparked considerable debate over its implications for the future of AI technology and investment strategies in the sector.

The Shock Wave in AI Stocks

  • Market Reactions:
    Following the announcement and introduction of DeepSeek R1, major AI stocks including NVIDIA, Broadcom, and Microsoft saw declines of 6% to over 11% in a volatile trading environment. This indicates market anxiety over potential cost reductions and market shifts in the AI sector.

  • Analyst Insights:
    Analysts like Nomura’s Charlie McGellicott described DeepSeek as a “shock disruption agent,” suggesting its entry into the market could challenge existing models’ pricing and valuation frameworks dramatically.

The Cost Factor Debate

  • Cost Comparisons:
    DeepSeek claims that its R1 model costs only $5.6 million to train, which stands in stark contrast to OpenAI’s latest offerings that reach approximately $100 million in development costs. This discrepancy raises skepticism among analysts regarding the feasibility of DeepSeek’s claims.

  • Concerns on Credibility:
    Many experts argue that the claimed cost might overlook essential expenses involved in AI development. For instance, the transparency of certain operational costs associated with DeepSeek has been questioned, leading to implications that the modeling effort might not be as cost-effective as proposed.

Analysts Weigh In on Buying Opportunities

  • Buying Opportunity Perspective:
    Despite the turbulence, several analysts view this situation as a potential buying opportunity for established AI firms due to the uncertainty surrounding DeepSeek's claims. For instance:

    • Wedbush analysts suggest the sell-off presents a “golden buying opportunity” since they believe that the foundational tech and ecosystems of leading AI companies remain superior despite DeepSeek’s introduction.
    • Oppenheimer analysts even argue that DeepSeek could benefit semiconductor firms in the long run by lowering entry costs for AI technologies, enhancing overall market dynamics.
  • Diverse Opinions:
    The podcast illustrated a split in opinions, with some analysts predicting significant drops in PE ratios for AI-related U.S. tech firms, while others upgraded stocks like NVIDIA, considering the downturn a favorable entry point. This reflects an ongoing debate about the long-term effects and viability of AI investments post-DeepSeek.

Shift towards Defensive Sectors

  • Market Shifts:
    In the wake of the sell-off, there has been a noticeable movement of investments to safer sectors, such as consumer staples and healthcare, while tech stocks have been shunned. The Dow, often overlooked for its lower risk profile, is regaining attention as investors seek stability in volatile conditions.

Implications for the Future

  • Market Outlook:
    The podcast suggests cautious optimism for continued AI innovations despite recent fears. Analysts posit that upcoming earnings reports could offer a clearer view of the market dynamics and soothe the worries of investors.

Conclusion

In summary, the episode of DeepSeek Deep Sixes Stocks highlights the significant impact that emerging innovations like DeepSeek R1 can have on market perceptions and stock valuations within the AI sector. With contrasting views among analysts regarding the future of AI stocks, it underscores the complex interplay of market sentiment and technological advancements.

Key Takeaways:

  • DeepSeek’s introduction poses a challenge to existing AI revenue models.
  • Analysts suggest mixed reactions: potential buying opportunities vs market risks.
  • A shift towards defensive sectors indicates changing investor behaviors.
  • Earnings reports on the horizon could clarify the market's direction moving forward.

This episode provides a nuanced perspective on the evolving landscape of AI technology and its financial implications, making it a must-listen for investors in the tech sector.

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