Chinese Startup Disrupts AI Market

• By John K. Waters
• 01/28/25

A new low-cost artificial intelligence model from China is wreaking havoc in the technology sector, with tech stocks plummeting globally as concerns grow over the potential disruption it could cause. News of the launch prompted widespread selloffs from Tokyo to New York, with major AI leaders like Nvidia taking significant hits.

Chinese startup DeepSeek launched a free AI assistant last week that it claims uses less data and operates at a fraction of the cost of its competitors. By Monday, DeepSeek's assistant had surpassed U.S. rival ChatGPT in downloads from Apple's App Store. This development raised fears about the dominance of current market leaders in the AI space.

The Nasdaq Composite Index tumbled more than 3%, with Nvidia's shares plunging over 17%, marking its largest single-day loss ever. According to LSEG data, Nvidia's market value was on track to drop more than $600 billion — more than double its previous record one-day loss last September. Other major tech players were similarly affected: Broadcom fell over 18%, Microsoft, a backer of ChatGPT developer OpenAI, slipped 2.3%, and Alphabet dropped 3.4%.

The Philadelphia Semiconductor Index aced its largest decline since March 2020, tumbling more than 10%. The selloff began in Asia, where Japan's SoftBank Group fell 8.3%, and continued through Europe, with ASML sliding 7%.

DeepSeek, a Hangzhou-based startup, unveiled its DeepSeek-R1 model last week, reportedly 20 to 50 times cheaper to use than OpenAI's comparable model. The innovation has drawn praise from Silicon Valley leaders, including venture capitalist Marc Andreessen, who likened the breakthrough to AI's "Sputnik moment."

"DeepSeek R1 is one of the most amazing and impressive breakthroughs I've ever seen," Andreessen wrote on X.

The startup's researchers disclosed that their DeepSeek-V3 model, launched on January 10, was trained using Nvidia's H800 chips, costing less than $6 million. This marked a stark contrast to the billions invested by rivals such as OpenAI and Alphabet in AI development.

Investor anxiety spread rapidly as the implications of DeepSeek's cost-efficient model became clear. Brian Jacobsen, chief economist at Annex Wealth Management, described the development as a potential "disruption of the entire AI narrative that has driven markets over the last two years."

"It could mean less demand for chips, reduced need for massive power production, and fewer large-scale data centers," he said in an interview. "However, it could also democratize AI and enable a wave of new applications."

Shares of companies tied to AI infrastructure saw steep declines. Data center builder Vertiv Holdings plummeted more than 30%, while utility companies that recently benefited from AI-related demand projections also fell sharply: Vistra dropped 28%, Constellation Energy lost 20%, and NRG Energy was down more than 14%.

Not everyone viewed the selloff as justified. Daniel Morgan, senior portfolio manager at Synovus Trust Company, called the market reaction an overcorrection.

"DeepSeek's AI model competes with ChatGPT, Meta Platforms, and Alphabet's Gemini, but its focus is on mobile phones and PCs rather than data centers," he noted in an interview. "The real money in AI is still in providing chips for data centers, which remains Nvidia's strength."

Still, Nvidia shares were last down over $24, trading at $117.69, marking a record daily loss. The stock, which soared 171% in 2024 and 239% in 2023, now trades at 56 times its earnings, compared to the Nasdaq's multiple of 16.

The hype around AI has driven unprecedented capital inflows into equities over the past 18 months, inflating valuations and pushing stock markets to record highs. As recently as last Wednesday, AI-related stocks rallied after former President Donald Trump announced a $500 billion private-sector plan for AI infrastructure through a joint venture called Stargate, backed by SoftBank, OpenAI, and Oracle. However, the recent selloff underscores the market's sensitivity to disruptive developments in AI, with DeepSeek’s emergence highlighting both the opportunities and risks of an increasingly competitive AI landscape.