The stock market 'is telling us that cheap, open-source AI is a good thing' after DeepSeek rout

Dow Jones01-28

MW The stock market 'is telling us that cheap, open-source AI is a good thing' after DeepSeek rout

By William Watts

Investors aren't ignoring the upsides of cheaper AI models despite Monday's DeepSeek-inspired stock-market panic

So it turns out that the prospect of cheaper artificial intelligence that doesn't require a wholesale reordering of the energy grid and the depletion of water and other natural resources might be a good thing for the stock market.

Or at least it's a potential positive for shares of companies other than those that have seen a monster rally over the past two years based on massive and ever-growing spending on expensive semiconductors and other infrastructure.

That seems to be the initial tell of the tape after the shock delivered Monday by Chinese startup DeepSeek and its low-cost AI model, which sent shares of chip giant Nvidia Corp. $(NVDA)$ down by 17% and saw the Nasdaq Composite COMP fall 3%. Utilities and other energy plays tied to the build-out of electricity-hungry data centers also slumped. The drop wiped out over $1 trillion in market value from U.S. exchanges, including more than half a trillion off Nvidia's market cap alone.

Stocks were bouncing back on Tuesday, and even Monday's carnage was concentrated on Nvidia and other prime beneficiaries of the AI spending boom.

Apple Inc. $(AAPL)$ and Meta Platforms Inc. $(META)$ both rose solidly Monday, while Amazon.com Inc. $(AMZN)$ eked out a gain, noted Nicholas Colas, co-founder of DataTrek Research, in a note. Microsoft Corp. $(MSFT)$ and Alphabet Inc. $(GOOG)$ $(GOOGL)$ both lost ground, but the declines were nowhere near the scale suffered by Nvidia. The S&P 500 SPX dropped 1.5% but saw 351 of its stocks rise and 152 fall. The Dow Jones Industrial Average DJIA eked out a gain.

"The market is telling us that cheap, open-source AI is a good thing," Colas said.

After all, lower AI-related capital expenditures means larger buybacks and higher dividends from established companies that market useful AI tools to large global user bases, he wrote.

At the same time, it's no wonder the market had an air of panic on Monday.

"Put simply, DeepSeek threatens the entire bull case for the semiconductor and AI names, and if that occurs then the entire AI-driven rally in tech and the S&P 500 of the past two years is at risk," Tom Essaye, founder of Sevens Report Research, said in a Tuesday note.

The fear is that DeepSeek could undermine the chip-driven spending cycle that has sent shares of Nvidia, Broadcom Inc. $(AVGO)$ and other semiconductor companies surging, Essaye said.

Moreover, much of the earnings growth that's expected for the S&P 500 is based on expectations for AI-driven tech stocks, Essaye said. If those earnings expectations turn out to be too optimistic, then the valuation of the already expensive S&P 500 will be even more lofty and difficult to justify.

As Essaye explained, Wall Street has forecast S&P 500 earnings to rise from $245 a share in 2024 to $270 a share in 2025, with much of the gain driven by AI-related stocks. If that doesn't happen, then instead of the S&P 500 trading at a valuation of 22 times earnings (6,000 divided by $270), it would be trading at an unsustainable valuation of 25 times (6,000 divided by $245).

Meanwhile, questions remain around DeepSeek and whether it really was able to train its AI model as cheaply as claims. But investors are left to wrestle with whether the prospect of free, open-source generative AI that uses fewer power-hungry chips and less electricity would be a good thing or a bad thing for Big Tech, Colas said.

In addition to having more capital to return to shareholders via buybacks and dividends, big U.S. tech players can turn their attention to creating useful, monetizable tools for their users. "This has been the missing piece of the puzzle ever since ChatGPT launched the AI craze in late 2022," he wrote.

And the benefits could extend beyond those tech companies. If DeepSeek is for real, showing that AI and large language models are commodities, then research and development at smaller tech firms could be poised to explode, Essaye said.

"Ultimately, with more R&D around AI it's reasonable that someone will find a way to make it useful and profit boosting for companies of all industries, which is the necessary next step in the AI movement," he wrote.

See: 7 software stocks that could benefit as AI gets cheaper to run

-William Watts

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January 28, 2025 15:27 ET (20:27 GMT)

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