DeepSeek: The AI Disruptor That’s Rattling Silicon Valley

DeepSeek, a Chinese AI startup, has exploded onto the scene, forcing investors to take notice. The company has unveiled its latest AI model, DeepSeek R1, which rivals industry giants OpenAI and Meta. What makes this so remarkable? It has achieved comparable performance at a fraction of the cost and with far fewer of Nvidia’s cutting-edge GPUs. This development has sent shockwaves through the AI industry, shattering the long-held belief that only the wealthiest tech firms could build top-tier AI models. 

Unlike OpenAI and Google’s Gemini, DeepSeek has embraced an open-source approach, making its model accessible for developers to build upon. If its claims hold up, it could mark a turning point in AI development, reducing reliance on the massive data centre infrastructure that has defined the industry so far. The implications are profound, particularly for the US technology sector, which has operated under the assumption of unchallenged supremacy. 

DISRUPTING THE AI STATUS QUO – WHO WINS AND WHO LOSES?

DeepSeek’s breakthrough raises fundamental questions about AI’s future. For years, Silicon Valley has relied on the idea that AI advancements require exponentially increasing computing power, reinforcing Nvidia’s dominance and a ‘winner-takes-all’ market. DeepSeek has just flipped that script, indicating that high-performance AI can be achieved with greater efficiency and lower costs. 

This could be a game-changer for companies outside the traditional AI powerhouses. Businesses that previously had no choice but to rent computational resources from OpenAI or Google might now be able to run their own models more affordably. This could fuel a fresh wave of AI adoption across industries. Meanwhile, cloud computing giants like Amazon and Microsoft, which have invested billions in AI infrastructure, may find some of their expected returns now at risk. 

NVIDIA – AI’S BIGGEST SUPPLIER TAKES A HIT

The stock market reaction to DeepSeek’s announcement was swift and brutal. Nvidia, the undisputed leader in AI chips, saw its market value plummet by nearly $600 billion in a single day. This was the largest one-day loss for any company in history, triggering a wider sell-off in tech stocks, particularly among firms heavily exposed to AI infrastructure. 

Nvidia’s business model hinges on the assumption that ever-increasing computational power is essential for AI breakthroughs. DeepSeek’s model challenges this belief. If companies can achieve comparable results using older, less expensive chips, Nvidia’s premium pricing power (they have been achieving 50% profit margins for the past year) could face major headwinds.  

 US-CHINA AI RIVALRY HEATS UP

Beyond financial markets, DeepSeek’s breakthrough has geopolitical implications. The US has been tightening restrictions on China’s access to advanced AI chips, imposing export controls on Nvidia’s latest GPUs. Yet, DeepSeek’s success suggests that China is still finding ways to innovate despite these restrictions. 

This could escalate tensions between the US and China, particularly as AI is increasingly seen as a pillar of global technological power. Washington may respond with stricter controls or increased domestic AI funding, while Beijing is likely to double down on its own AI efforts. If DeepSeek’s model is as powerful as claimed, it could trigger a new phase in the AI arms race—one that is no longer dictated solely by who controls the most GPUs.

Furthermore, Chinese AI models may be subject to fewer restrictions in areas such as data privacy, security protocols, and the management of Artificial General Intelligence (AGI). While Western AI firms operate under strict regulatory oversight regarding ethical AI deployment, China may allow for more experimental applications and fewer limitations on AGI research. This could accelerate AI advancements but also raise concerns over control, bias, and the responsible use of these technologies on a global scale. 

WHY THIS MATTERS FOR HUNDLE’S STRATEGY

At Hundle, we have maintained an underweight position in US technology stocks, driven largely by concerns over stretched valuations. The market reaction to DeepSeek validates our stance that many AI-focused stocks are priced for perfection, leaving them highly vulnerable to shifts in market dynamics. 

While we do not believe this development signals the end of US AI dominance, it serves as a timely reminder that investors must be mindful of valuations, particularly in sectors where expectations of future growth are extreme. Nvidia has enjoyed extraordinarily high profit margins, but capitalism, working properly, should encourage competition. When companies achieve outsized returns, it is only natural that new players will seek to enter the market and challenge the status quo. That might just have happened with DeepSeek.  

Investors should take note—AI’s next chapter is shaping up to be more unpredictable than anyone anticipated.