January 27, 2025
One of the biggest market drivers of technology stocks over the past couple of years has been rapid advancements in the field of artificial intelligence (AI). These next-generation algorithms took a giant leap forward from their predecessors, promising to streamline processes and improve productivity. Many big tech companies have been spending heavily to get a jump on the technology.
But a Chinese start-up called DeepSeek may have just upended conventional thinking about how best to train AI models. As a result, a slew of AI stocks tumbled on Monday. AI-centric chipmaker Nvidia (NASDAQ: NVDA) crashed 17.3%, semiconductor specialist Broadcom (NASDAQ: AVGO) crumbled 16.4%, cloud and software giant Microsoft (NASDAQ: MSFT) slumped 3.8%, and cloud computing and search titan Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) fell 2.8%, as of 11:43 a.m. ET.
One-year-old Chinese start-up DeepSeek introduced its latest AI model, dubbed R1, and its abilities caught many in the tech world off guard. The performance of the system, which is similar to OpenAI's ChatGPT, quickly ascended the ranks to become one of the top 10 in the world. What made these results even more striking was that they were achieved with older-generation processors at a much lower cost, according to the company.
DeepSeek achieved these remarkable results by taking a new approach to training its AI models. The process, known as reinforcement learning -- or reward-driven optimization -- appears to be more adept at refining its strategy for problem-solving or attempting different approaches to achieve the desired results.
Thus far, one of the biggest challenges with AI is not knowing how the algorithms arrived at a particular conclusion, making them a "black box." DeepSeek's R1 model shows its work, thus eliminating the uncertainty.
Venture capitalist and well-known tech aficionado Marc Andreessen fueled the fire this weekend when he posted on X (formerly Twitter) that "DeepSeek R1 is one of the most amazing and impressive breakthroughs I've ever seen -- and as open source, a profound gift to the world."
To be clear, experts say that DeepSeek's R1 still trails the performance capability of models produced by OpenAI and Alphabet, but the fact that it was able to do so with a smaller number of inferior chips threatened to upend the existing paradigm.
AI stocks and the broader tech sector plunged on the news, reeling from the potential implications for the industry:
That said, veteran Wedbush tech analyst Dan Ives called today's sell-off a "golden buying opportunity," noting that many of the claims by the start-up have yet to be verified. He goes on to suggest that "no U.S. Global 2000 [company] is going to use a Chinese start-up DeepSeek to launch their AI infrastructure," saying it doesn't rise to the level of "competitive threat."
Further fueling the decline of some of these stocks is their higher valuations, at least when measured using the most commonly employed metrics. Heading into today's trading, Broadcom, Nvidia, and Microsoft were selling for 200 times, 56 times, and 37 times earnings, respectively. Alphabet was the outlier, selling for a discount at 27 times earnings.
It's important to note that while the price-to-earnings (P/E) ratio is among the most widely used valuation metric, it tends to fall short when assessing high-growth stocks. After today's decline, Nvidia, Microsoft, Broadcom, and Alphabet are selling for 41 times, 33 times, 33 times, and 22 times forward earnings -- so they're not nearly as expensive as they might appear at first glance.
Finally, it's still early days in the development of generative AI. Today is a prime example of a knee-jerk reaction from some investors when a more measured approach is called for. Each of our quartet of stocks has an impressive track record going back decades, and while it may be tempting to follow the crowd and give in to the market panic, astute investors will know to wait for all the evidence to come in before leaping to what could be a costly conclusion.
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
Learn more »
