US tech shares took a hit, especially AI stocks which plunged as low as 20%, amid investor concerns that Chinese artificial intelligence startup DeepSeek may disrupt the AI growth story that has powered the US stock rally over the past two years.
But is there a cause for panic? Is the new Chinese AI model going to dominate the AI industry?
Analysts at UBS and Bernstein certainly disagree. Here’s what they have to say:
Bernstein
Bernstein put out their thoughts that the panic around DeepSeek has primarily been a combination of some factors: 1) a fundamental misunderstanding over the “$5M” number, 2) DeepSeek’s deployment of smaller models “distilled” from the larger R1, and 3) DeepSeek’s actual pricing to use the models, which is admittedly far below what OpenAI is asking.
“Our own initial reaction does not include panic (far from it). If we acknowledge that DeepSeek may have reduced costs of achieving equivalent model performance by, say, 10x, we also note that current model cost trajectories are increasing by about that much every year anyway (the infamous “scaling laws…”) which can’t continue forever,” said the global brokerage firm in its note.Bernstein clarifies that the widely cited $5 million cost for DeepSeek’s AI model development seems misleading. The firm explains that DeepSeek comprises two model families: V3, an MoE model requiring fewer compute resources for comparable performance; and R1, a reinforcement learning-enhanced version of V3 achieving strong reasoning capabilities. While the $5 million figure reflects a hypothetical GPU rental cost for V3’s training (using 2048 NVIDIA H800 GPUs for 2 months), Bernstein argues it omits substantial prior research and development expenses, as well as the undisclosed (but likely significant) resources invested in developing the R1 model.The foreign brokerage firm also stated it believes that we NEED innovations like this (MoE, distillation, mixed precision etc) if AI is to continue progressing. Additionally, it should be noted that it is unlikely DeepSeek’s innovations are entirely novel, given the numerous top AI researchers at other global labs (though their specific methods remain undisclosed).
Further, the analysts said that the recent DeepSeek news coincides with several significant developments: Meta’s substantial capex increase, the Stargate announcement, and China’s massive $140B AI spending plan. These events reinforce the continued, and growing, demand for AI chips, reaffirming that DeepSeek is not the end of the AI world.
Also read: DeepSeek sparks global AI selloff, Nvidia losses about $593 billion of value
UBS
Analysts at UBS believe that AI is here to stay and if anything, DeepSeek only reinforces the belief that the potential success of DeepSeek does not derail the AI growth story.
“The overall market can grow, with potentially lower costs accelerating AI adoption across industries and further improving productivity gains,” UBS analysts believe, stating that even if DeepSeek’s model will be the way to go for the broader AI industry, it is not necessarily a zero-sum game.
Drawing a parallel with the mobile phone industry, UBS suggests that while more cost-effective smartphones led to broader global adoption, established leaders maintained their dominance in the high-end segment.
Similarly, the established large language models (LLMs) may cater to the premium knowledge worker segment (10-20%) while DeepSeek’s open-source model could drive wider adoption.
UBS too, quoted Meta’s substantial capex increase in its AI infrastructure, stating that the capex commitments from leading US tech companies remain intact.
“In addition, big tech’s AI spending includes development of other models that involve the generation of audio and video, which appears to be out of scope for DeepSeek’s current application. We believe sufficient capex is required to continue to produce innovative AI models as the technology advances,” the UBS report added.
Also read: Anant Raj shares nosedive nearly 20% amid global fears of low-cost AI models
As technology and competition evolve, it only makes sense that the investors shift focus between enabling, intelligence, and application layers.
While value may eventually migrate from infrastructure developers (enabling layer) towards users (application layer), premature conclusions are cautioned, according to UBS.
Lower costs could boost demand for the enabling layer through wider adoption. Q4 earnings season should provide clarity on Deepseek, big tech capex, and AI monetization.
Further, the US consumer sentiment is declining due to unemployment and inflation concerns, exacerbated by tariff uncertainty. However, a resilient labor market (as seen in December’s employment data) and the potentially limited impact of targeted tariffs on overall inflation offer a counterpoint.
These volatile times make UBS believe that underallocated investors can consider structured strategies to buy equities on dips or use pockets of volatility as a means of generating diverse sources of income.
In conclusion
DeepSeek’s emergence reinforces the staying power of AI, but also highlights the risks of concentrated or passive investment strategies.An active, diversified approach is recommended for AI exposure. However, upcoming big tech earnings will provide more insights into value creation trends.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
