AI stocks plunged yesterday, mirroring the crimson hue of China’s flag, as a young Chinese startup, DeepSeek, introduced an AI model that could rival the efforts of major players like OpenAI, Alphabet, and Meta—all at a fraction of the cost.
The Nasdaq 100, heavily weighted by tech companies, saw its value shrink by nearly $1 trillion following the release of DeepSeek’s groundbreaking R1 “reasoning” model. The low-cost, open-source AI system demonstrated capabilities on par with OpenAI’s o1 model, triggering fears that U.S. tech giants investing billions in AI could be outpaced by DeepSeek’s lean and efficient approach.
DeepSeek’s R1 model, which is now the most downloaded free app on iPhone, boasts a jaw-dropping development cost of just $6 million—roughly 3% of the estimated budget for OpenAI’s o1. This release follows DeepSeek’s earlier V3 model, which reportedly rivals OpenAI’s GPT-4o.
What’s even more remarkable is that DeepSeek achieved this milestone despite relying on Nvidia chips that are less advanced than those used by its competitors, thanks to U.S. export restrictions designed to preserve America’s dominance in AI. As a result, Nvidia’s stock took a 17% dive yesterday, while shares of Alphabet and Microsoft dropped by over 4% and 2%, respectively.
Skepticism and Market Reactions
While the immediate market response was a sharp selloff, analysts at Goldman Sachs believe DeepSeek’s success highlights the ability of smaller AI firms to innovate by making the most of limited resources. However, many experts argue that U.S. companies still hold a competitive advantage due to access to cutting-edge chips.
Some remain doubtful about DeepSeek’s claims of achieving such remarkable results on a tight budget. Bernstein analysts called the stock selloff a “Twitter-fueled panic,” noting that while DeepSeek’s efficient use of computing power is impressive, the overall demand for AI technology could surge, increasing the appetite for high-performance chips—good news for Nvidia and its investors.
What’s Next?
Looking ahead, analysts believe U.S. policymakers may consider tightening restrictions on AI chip exports to China even further in response to DeepSeek’s advancements. Such measures would aim to slow the progress of Chinese AI development while safeguarding America’s edge in the rapidly growing field.
For now, DeepSeek’s rise serves as a wake-up call to Big Tech and a reminder that resourceful startups could pose a serious challenge in the race for AI dominance.
