It was all going so swimmingly for the ‘big tech’ stocks, wasn’t it?
That was until Monday when, out of the blue, something came along that had traders trembling and artificial-intelligence investors both irked and intrigued.
The news that Chinese start-up DeepSeek had created a generative AI chatbot similar to ChatGPT – but for a fraction of the cost – sent shockwaves through the market.
Some have disputed its claim that it managed to produce it for $6m. Indeed, as the company admitted in its own communications, the costs are only for the final training run.
However, it did raise questions about whether Big Tech firms such as Microsoft and Meta are overspending on their own AI infrastructure.
It was enough to worry Wall Street so much that the S&P 500 fell by 2% and the Nasdaq tumbled 3.5% following the announcement.
NVIDIA lost an astonishing $600bn of market value in the space of 24 hours – the biggest ever loss for a stock in a single day, while CEO Jensen Huang had $20bn wiped off his net worth.
The firm, which overtook Microsoft last year to become the world’s most valuable company, saw its share price plummet 17% to boot.
Other big semiconductor names caught in the crossfire include custom-chip designer Broadcom and memory specialist Micron.
Outside of the US, stocks that took a hit ranged from Taiwan Semiconductor Manufacturing Company through to ASML, the Dutch builder of chip-printing machines.
Over the past few years, NVIDIA and the rest of the ‘Magnificent 7’ have enjoyed a great run, providing stellar returns for investors.
But many analysts have warned that that some of these companies’ stocks are overvalued.
There was an air of inevitability that their bubble was going to burst eventually.
Perhaps my favourite analogy was from Syz Group CIO Charles-Henry Monchau, who said he’d predicted the ‘Mag 7’ would turn into the ‘Lag 7’.
It’s far too soon to say if that’s true – what it means for AI investors in the long term isn’t clear.
As Money Marketing’s chief reporter Lois Vallely mentioned in her Weekend Essay last week, clever investors like Warren Buffet play the waiting game.
Those who weathered the storm and held their nerve through once-in-a-generation events like Covid and Brexit will attest to this.
But if nothing else, these sort of shocks – and subsequent market volatility – really do reinforce the need for investors to build a diverse and resilient portfolio.
As many financial advisers will tell you, putting all your eggs in one basket is always a risky game.
Schroders group CIO Johanna Kyrklund agreed, saying: “We’ve discussed before the dangers that highly concentrated equity markets can pose to investors.
“From a portfolio standpoint, having such high unintentional exposure to just a handful of companies does not feel prudent.”
Kyrklund’s colleagues, Paddy Flood and Simon Webber, believe that if increased compute efficiency leads to reduced demand for chips/AI equipment, companies like NVIDIA and other compute infrastructure providers could suffer.
They add this outcome is far from certain. But on the flip side, they say this development could actually prove favourable for some software companies.
There are still a lot of uncertainties that need to be resolved.
These include clarifying DeepSeek’s cost structure and whether cheaper infrastructure would really lead to less spending in the global AI arms race.
This uncertainty does create risk, but the severity of these moves is likely to create opportunities for active investors, particularly in technology and industrials.
Even a 17% drop in NVIDIA’s share price is a very small dent compared to its huge gains in recent times, and many will feel there’s no need to be too concerned.
Jamie Mills O’Brien, manager of abrdn’s Global Innovation Equity Fund, shares that view.
He said that despite the initial de-rating of many tech stocks across the AI semi supply chain, demand could remain robust and he remains relatively bullish on its prospects.
Another product developed in China entering the market also raises questions around cybersecurity.
Since 2019, there have been fears that phone manufacturer Huawei could have used its technology to spy on Western countries.
Most recently, social-media platform TikTok faced threats from the US it will be banned unless it cuts ties with China over the same worries of espionage.
Now we’ve had a few days to digest DeepSeek’s announcement, it will be really interesting to discover what lies in store in the weeks and months ahead.
Could it raise questions over whether America’s lead in AI is shrinking? This will be especially relevant with several major tech companies scheduled to report earnings.
It’s difficult to say whether DeepSeek is here to stay.
But one thing’s for sure – the fact it is currently the most downloaded app in Apple’s App Store means, in the short term at least, the noise isn’t going to go away.
