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DeepSeek is making Wall Street nervous about the AI spending boom: Here’s what we know
The AI frenzy that has reshaped the tech world and commanded the attention of Wall Street took an anxious turn Monday after a Chinese upstart burst onto the scene , dazzling early users and sparking fears that US AI leadership is now under threat.
It wasn’t just the Chinese model’s performance that rattled American investors and executives. The team behind DeepSeek, the AI model maker, claims that the technology uses cheaper chips and less data than the popular American AI assistants that have captivated the tech elite and the broader public.
A foreign competitor offering a rival product at a fraction of the cost has thrown into question the exorbitant spending of American tech giants. And it has poked holes in the idea of US tech supremacy and innovation, at the cost of many of Wall Street's most favored companies.
If the most expensive and sought-after AI chips aren't as vital as previously thought, an entire ecosystem built around massive AI investment could be in jeopardy.
What is DeepSeek?
DeepSeek is a Chinese startup that develops AI models. Its new R1 model, released in late January, has drawn swift praise for its performance benchmarks. Its impressive feats spurred a surge in usage. The DeepSeek app now ranks at the top for iPhone downloads in the US, just ahead of OpenAI's ChatGPT. " DeepSeek-R1 is now live and open source, rivaling OpenAI's Model ," the company claims on its website.
Is DeepSeek better than ChatGPT and other AI assistants?
American venture capitalist Marc Andreessen called the model “ one of the most amazing and impressive breakthroughs I’ve ever seen .” Perhaps even more striking than DeepSeek's on-par performance is the cost of its development. DeepSeek claims that its breakthrough model cost less than $6 million to train. That's a staggeringly modest figure, considering OpenAI’s GPT model cost more than $100 million to train.
If Wall Street had already expressed some skepticism about the AI spending sprees of US tech companies, the existence of a cheaper alternative could amplify that criticism. The broader implication of DeepSeek's usefulness is that it may undermine the current development process of AI assistants. Why should investors accept huge spending increases from US tech giants when a cheaper alternative is already available?
How is the market reacting?
The American tech company at the heart of the AI growth story received one of the sharpest blows. Nvidia ( NVDA ) stock dropped 17%. Other members of the "Magnificent Seven" who have made AI central to their growth stories also took some damage. Microsoft ( MSFT ) fell 2%, while Alphabet ( GOOGL , GOOG ) lost 4% on Monday.
Other chip and infrastructure players also came under pressure. Broadcom ( AVGO ) sank 17%. Micron ( MU ) gave up nearly 12%, and Advanced Micro Devices ( AMD ) closed the trading day down 6%.
The financial significance of prominent tech players weighed down the entire market. Two of the major indexes were in the red, with the tech-heavy Nasdaq Composite ( ^IXIC ) shedding 3%.
A slowdown in tech also highlighted how reliant the broader market is on Silicon Valley to continue to deliver growth. Any risk to tech's upward trajectory can have an outsize impact on Wall Street.
Hasn't the US limited the sale of advanced chips to China?
The global battle over tech supremacy has escalated in recent years, evolving into a key theme in foreign policy. Logistic shocks brought on by the COVID pandemic also underscored the importance of domestic supply chains and protecting access to key technology.
The US has attempted to maintain its edge in advanced tech by banning the export of certain goods in the interest of national security. Cutting-edge GPU semiconductors, the kind used in building out advanced AI tools, are among the technologies that American firms are restricted from selling to China.
But the early success of DeepSeek, which was purportedly developed for mere millions, indicates its engineers were able to essentially circumvent those restrictions by working with less advanced technology. The export controls were designed to prevent or slow China's AI progress. But in forcing Chinese technologists to work without the most cutting-edge tools, a foreign competitor managed to develop a far cheaper and perhaps more innovative model.
Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on X @hshaban .