Made in China, DeepSeek was released just eight days ago on 20 January 2025 and has already shot to the top of the App Store’s downloads, gaining the attention of the worldwide tech industry.
UK investors might feel a million miles away from the US or China, but most investors’ pensions and investment portfolios will include US technology stocks.
What is DeepSeek?
DeepSeek is a generative AI chatbot that looks set to rival ChatGPT – but at a fraction of the cost. The Chinese lab claims it developed its AI model – called R1 – in just two months for under $6m. In comparison, OpenAI’s o1 model reportedly cost $600m to train.
R1 has similar abilities to other AI models’ technologies. It’s free and open-source, meaning anyone can use it and modify it.
DeepSeek was founded in December 2023 by Liang Wenfeng, the CEO of a hedge fund called High-Flyer. High-Flyer uses AI to analyse financial data to make investment decisions.
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DeepSeek claims R1 was built so cheaply because it uses fewer advanced chips. This has led to doubts that big budgets and top-tier chips are the only ways to advance AI, causing tech stocks in the US to fall sharply.
Is the AI bubble about to burst?
The prospect of cheaper AI development sparked a tech sell-off in the US markets yesterday (Monday). The NASDAQ Composite Index sank more than 3%, and the S&P 500 dropped nearly 1.5%, although both have partially recovered today (Tuesday).
US chip-making firm Nvidia was particularly hard hit; its stock price plunged by 17% on Monday and lost nearly $600bn in market value at one point. The chip maker had previously been the most valuable company in the world when measured by market capitalisation.
Meta Platforms, Microsoft, and Alphabet stocks have all come under pressure too, as investors questioned whether their high share prices were justified.
What do the experts say?
Daniel Casali, chief investment strategist at Evelyn Partners, said DeepSeek has caused turmoil in the markets and raised uncertainty about chip demand.
He said: “This new model, which appears to be cost-effective, could impact the broader AI landscape by making AI models more affordable and efficient. However, it has yet to be fully verified, leaving questions about its true capabilities and comparison with OpenAI’s ChatGPT models.
“In the short term, this has led to share price volatility, especially among companies most exposed to the AI theme. Nvidia fell -17%, Broadcom is down -17.4%, Cadence Design Systems is off -9.5%, and Alphabet, Microsoft and Tesla shares slid -8.4%, -4.2% and -3.2% respectively. We see this as more of a rotation within the market as per our ‘broadening out’ theme than a risk-off move away from equities, with most stocks in the S&P 500 in positive territory.”
Laith Khalaf, head of investment analysis at AJ Bell, said: “Despite knocking over half a trillion dollars off the market value of Nvidia, the sell-off sparked by DeepSeek’s technology might prove to be short-lived, or relatively contained, or both.
“Certainly not all of the Magnificent Seven have so far been impacted to the same degree, with shares in Apple actually posting a decent increase on the day thanks to its relatively modest AI spending and the potential for cheaper AI to boost usage via mobile devices. Even so, the wobble caused by DeepSeek does highlight the potential for the AI arms race to disrupt the hegemony currently enjoyed by the big US tech titans. The disruptive threat could come from an outsider, like DeepSeek, or from other companies within the Magnificent Seven taking a leading role in the AI industry at the expense of competitors.”
