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How DeepSeek changed the market's mind

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February 01, 2025

TLDR: New AI model by Chinese company DeepSeek disrupts market as it claims cheaper production costs and less computing power compared to competitors like ChatGPT, Claude, or Gemini, causing hundreds of billions of dollars in valuation losses for related AI companies.

1Ask AI

In the recent episode of Planet Money, hosts Mary Childs and Kenny Malone delve into the financial earthquake caused by the sudden rise of DeepSeek, a new AI model developed by a Chinese company. This podcast episode is packed with insights about the implications of DeepSeek on the stock market and the future of AI.

The Sudden Market Shift

Monday marked a significant change in the stock market, as AI-related stocks experienced a massive plummet, wiping out hundreds of billions in valuations. The hosts describe it as an "AI apocalypse," sparked primarily by the introduction of DeepSeek, which demonstrated capabilities similar to those of leading American AI models, such as ChatGPT, but with significantly lower production costs.

Key Events Leading to the Downturn

  • DeepSeek’s Emergence: Announced amidst rising optimism regarding AI, its unexpected capabilities led to a sudden market correction.
  • Market Reaction: The stock prices of major companies like NVIDIA, which produces essential chips for AI models, dropped significantly, causing shockwaves through tech sectors.

DeepSeek's Economic Impacts on AI Models

Disruption of Established Assumptions

DeepSeek's announcement challenged existing beliefs about the infrastructure needed for advanced AI models. Historically, companies like OpenAI had invested billions, relying on high-end semiconductors. However, DeepSeek's model suggests:

  • Lower Costs: It can function efficiently without the expensive components previously deemed necessary for successful AI implementation.
  • Reduced Energy Needs: The energy consumption concerns related to AI computing may have been overstated, influencing related stocks like those in the nuclear power sector.

Implications for Investors

Investors had to rethink their strategies:

  • Chip Manufacturers: Major players like NVIDIA and Marvell faced immediate scrutiny, leading to substantial drops in their stock prices as market fears intensified over demand for their products.
  • Energy Stocks: Companies like Constellation Energy, which were previously surging due to predicted energy needs for AI, also saw declines. The market's reevaluation indicated a potential reduction in necessary energy consumption for AI operations.

The AI Enabler vs. Adopter Debate

The episode categorizes companies into two groups regarding their relationship to AI:

  1. AI Enablers: Companies that provide the necessary hardware and infrastructure, such as chipmakers and energy providers.
  2. AI Adopters: Businesses that utilize AI to enhance their services, like Salesforce, which reportedly saw its stock rise.

This shift signifies a move away from AI enablers towards adopters, as confidence waned in the traditional structure of AI development.

The Market's Response and Future Outlook

While the initial panic led to drastic sell-offs, the market is beginning to stabilize, albeit with a cloud of uncertainty as investors grapple with the implications of DeepSeek on future AI landscape:

  • Valuation Recovery: Despite losses, companies like NVIDIA remain key players. Analysts continue to hold long-term bullish views, interpreting Monday's events as an overreaction rather than a fundamental change in tech necessity.
  • Broader Access to AI: The accessibility of AI models could democratize AI technology, suggesting a future where smaller enterprises or individuals can develop effective AI models without immense capital.

Key Takeaways

  • Innovation in AI Development: DeepSeek's rise indicates a potential shift in how AI models can be developed more economically without expensive chips or vast energy requirements.
  • Investment Strategies Reassessed: As the market recalibrates, there's an opportunity for investors to balance their portfolios between enablers and adopters of AI technology.
  • Future of AI: The ongoing investigation into DeepSeek’s methods may redefine competitive advantages in the AI sector, challenging the previous principle that only large corporations could effectively compete.

Conclusion

The episode effectively illustrates how a single innovation can disrupt longstanding market assumptions, urging listeners to consider the potential for revolutionary changes within the AI industry. While some companies faced immediate losses, the long-term perspective emphasizes the importance of adaptability and innovation in the rapidly evolving landscape of artificial intelligence.

For listeners and investors alike, the discourse on DeepSeek serves as a critical reminder of the changing tides in technology and investment.

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