• Chinese AI startup DeepSeek’s free chatbot surpasses ChatGPT in Apple’s app store, triggering a major U.S. tech stock sell-off.
• Nvidia experiences a record one-day market-cap loss of nearly $593 billion, leading the tech-heavy Nasdaq Composite Index to fall 3.1%.
• DeepSeek’s R1 model, cheaper and more efficient than rivals, sparks debate about the sustainability of AI infrastructure investments in the U.S.
• Silicon Valley and Wall Street question the future of major AI investments, with some viewing the market selloff as an overreaction.
• Analysts see the downturn as a buying opportunity, with Nvidia and other chip stocks showing signs of recovery post-selloff.

A surge in popularity for the new, cost-effective artificial intelligence (AI) chatbot from Chinese startup DeepSeek prompted a dramatic sell-off in U.S. tech stocks on Monday, with chipmaker Nvidia suffering a record one-day market-cap loss of nearly $593 billion. The free AI assistant from DeepSeek, which launched last week, quickly overtook U.S. rival ChatGPT in downloads from Apple’s app store, raising concerns about the U.S.’s tech dominance and the future of AI infrastructure investments.

DeepSeek’s rise and market impact

DeepSeek, founded in 2023 by hedge fund manager Liang Wenfeng, released its latest AI model, R1, last week, claiming it was cheaper and more efficient than similar models from U.S. companies like OpenAI. The model’s rapid ascent to the top of Apple’s free app downloads chart sent shockwaves through the tech industry, leading to a 17% drop in Nvidia’s stock, the largest single-day percentage decline in the company’s history.

The tech-heavy Nasdaq Composite Index fell 3.1%, with Nvidia being the biggest drag on the index. Other tech giants like Broadcom, which fell 17.4%, and Microsoft, which dropped 2.1%, also felt the impact. The Philadelphia Semiconductor Index, which tracks the performance of semiconductor companies, tumbled 9.2%, its biggest drop since March 2020.

Wall Street and Silicon Valley react

The sudden rise of DeepSeek has sparked a debate on Wall Street and in Silicon Valley about the sustainability of the current AI investment model. Analysts and investors are questioning whether the massive investments in AI infrastructure, particularly in data centers and high-performance chips, are justified if a cost-effective alternative is available.

Marc Andreessen, a prominent Silicon Valley venture capitalist, described DeepSeek’s R1 model as “AI’s Sputnik moment,” drawing a parallel to the Soviet Union’s satellite launch that initiated the space race of the 1950s. Andreessen praised the model as a “profound gift to the world,” but the market’s reaction was less enthusiastic.

Some analysts, however, are counseling caution. Stacy Rasgon, a semiconductor industry analyst at Bernstein, called the market’s reaction “overblown,” noting that DeepSeek’s advancements, while impressive, are not based on unknown or secret technologies. Rasgon and other analysts argue that the current AI investment landscape is still robust, and that U.S. companies will continue to lead in AI development.

long-term outlook and market recovery

The immediate impact of DeepSeek’s success on the market was significant, but some analysts see the selloff as an opportunity to buy high-quality tech stocks at a discount. Daniel Morgan, a senior portfolio manager at Synovus Trust Company, which owns almost a million Nvidia shares, views the decline as a “wakeup call” but not a long-term threat. Morgan believes the real money in AI is in providing the high-performance chips needed for data centers, a market still dominated by Nvidia, AMD, and Broadcom.

Nvidia’s stock showed signs of recovery on Tuesday, rising 2.5% in after-hours trading. The company, in a statement, commended DeepSeek’s work as “an excellent AI advancement” that leveraged widely-available models, suggesting that the market’s concerns may be premature.

The broader market also showed signs of stabilization, with some chip stocks, including Broadcom, regaining some of their lost ground. However, the long-term outlook remains uncertain as the tech industry grapples with the implications of DeepSeek’s success and the potential for a more cost-effective AI future.

DeepSeek’s rapid rise has undeniably shaken the tech industry, raising questions about the future of AI investments and the U.S.’s global tech dominance. While the immediate market reaction was severe, many analysts believe the selloff was overblown and see the current downturn as an opportunity for investors to buy into high-quality tech stocks at more reasonable valuations. As the dust settles, the tech industry will continue to watch DeepSeek closely, with the potential for a new era of cost-effective AI solutions on the horizon.

Sources for this article include:

AOL.com

APNews.com

Finance.Yahoo.com

Investopedia.com