Chinese startup DeepSeek shakes up the AI market, causing a sharp selloff in tech stocks globally, with investors reassessing AI valuations.
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| DeepSeek's AI breakthrough causes a tech market crash, with investors questioning the future of AI companies and driving global stock declines. Image/ Illustration: ChicHue |
Tokyo, Japan — January 28, 2025:
A global selloff in technology stocks intensified on Tuesday, driven by the emergence of a low-cost Chinese AI model that has sparked a widespread reassessment of the sky-high valuations surrounding AI giants. The downturn, which began on Monday, saw significant losses in Japanese tech shares, following the launch of DeepSeek, an AI assistant from Chinese startup DeepSeek, that promises to use far less data and offer services at a fraction of the current cost. This has ignited concerns about the sustainability of AI stock prices and the growing dominance of major players in the sector, reads a ‘Investing’ post.
Nvidia, a leading symbol of the AI boom in recent years, saw its shares drop 17% on Monday, wiping out a record $593 billion from its market value in a single day. DeepSeek’s free AI assistant, which launched last week, has drawn considerable attention worldwide. While some skepticism remains, OpenAI CEO Sam Altman, the mastermind behind ChatGPT, called the model "impressive," yet assured that OpenAI would continue to lead the market with even better models. Altman expressed optimism about the new competition, calling it "invigorating" for the industry.
The rise of DeepSeek has triggered a global tech stock selloff, with ripples felt from Tokyo to Silicon Valley. With markets in South Korea and Taiwan closed for the Lunar New Year, and China shut until February 4, the focus has turned to Japan’s technology sector.
On Tuesday, shares of Advantest, a Japanese chip-testing equipment maker and key supplier to Nvidia, fell by 10% after dropping nearly 9% the previous day. Other major Japanese technology players, including chipmaking equipment manufacturer Tokyo Electron and investor SoftBank Group, also suffered losses, slipping 5% each. Kei Okamura, a portfolio manager at Neuberger Berman, noted that the selloff resembled previous market panics in Japan, such as the one in August, when the Nikkei index saw a sharp decline.
In the U.S., the effects of the selloff were felt as well, with Broadcom's stock dropping 17.4%, while Microsoft, a key backer of ChatGPT, fell by 2.1%, and Google parent Alphabet dropped 4.2%. The Philadelphia Semiconductor Index, which tracks key chipmakers, plunged 9.2%, marking its steepest decline since March 2020.
The selloff has highlighted concerns about the extreme valuations of many tech and AI companies, which have seen huge inflows of capital in recent years. These sky-high valuations now seem increasingly fragile, especially as investors reconsider the sustainability of these companies’ market dominance.
David Bahnsen, chief investment officer at The Bahnsen Group, remarked, "What makes Monday's tech selloff so jarring is that the valuations of many of these AI and tech companies offer no margin of error." He added that the heavy concentration of these stocks in investor portfolios and market indices had become a significant risk.
The AI hype has fueled a massive surge in capital flows into tech equities, inflating stock prices and pushing markets to record highs. Since the launch of ChatGPT in November 2022, the combined market value of seven major tech companies, dubbed the "Magnificent Seven," has risen by around $10 trillion. However, even companies outside the chipmaking sector, such as data center firms, have not been immune to the selloff. Malaysia’s YTL Power, for example, saw its stock fall 9% on Tuesday, continuing its streak of steep losses.
As investors struggle to assess the implications of DeepSeek's arrival, Okamura noted that many are still gathering information and analyzing the potential impact of new technological advancements. He suggested that these developments could have significant implications for future capital expenditures in the industry.
The spotlight now shifts to the earnings reports from major tech companies this week, as investors look for reassurance about AI investment strategies and the outlook for capital spending. Executives are expected to address concerns about the market’s volatility and the sustainability of the massive capital injections into AI.
DeepSeek, the startup behind the AI model that has disrupted the market, remains largely unknown to the public. Its controlling shareholder is Liang Wenfeng, co-founder of the quantitative hedge fund High-Flyer. The company’s DeepSeek-V3 model, launched on January 10, reportedly used Nvidia’s lower-tier H800 chips for training, at a cost of less than $6 million. The model’s efficiency and cost-effectiveness have caught investors' attention, especially in contrast to previous Chinese AI ventures, such as Baidu's ChatGPT equivalent, which failed to generate the same level of interest.
The success of DeepSeek’s model has disrupted the prevailing view that Chinese AI is years behind its U.S. counterparts. U.S. President Donald Trump referred to DeepSeek’s emergence as a "wake-up call" for American industries, while Japan's digital minister, Masaaki Taira, acknowledged that the new development challenges the conventional wisdom that Chinese AI was far behind. Taira pointed out that DeepSeek’s achievements indicated that China’s AI sector is not only catching up but could soon become a more cost-effective alternative.
As the race to dominate the AI sector intensifies, DeepSeek’s rapid rise raises key questions about the future of tech investments, the competitive landscape, and the sustainability of the valuations that have driven the AI boom. Investors will be watching closely as the fallout from this market disruption unfolds and as new competitors like DeepSeek push established industry leaders to adapt.