Today could be a very red day in the stock market, and DeepSeek might be to blame.
China's AI startup DeepSeek has captured the attention of enthusiasts ever since its launched its latest reasoning AI model, DeepSeek R1. It's just as smart or even more capable than competing models, including OpenAI's top model, while charging a lot less for AI access. It's free to use as a web or smartphone app, and it's available as open-source, meaning you can use it locally and fine-tune it as you wish, without worrying about the privacy implications or Chinese censorship.
In a matter of days, DeepSeek proved to be so popular as to climb to the top of Apple's App Store, surpassing OpenAI's ChatGPT as the most downloaded app.
But for owners of Nvidia stock, and stock traders in general, DeepSeek is on track of becoming a black swan — an unexpected event with extreme consequences.
Early on Monday, Nvidia stock went down 13% in premarket trading at one point, threatening to wipe more than $500 billion off of Nvidia's market cap. As of this writing, $NVDA is at $125.95, roughly 11% down from its last traded price of $142, while NASDAQ is down 3.9% in premarket trading.
The reason why the market reacted so poorly to DeepSeek can be found in its cost and efficiency. While we don't know all the details about DeepSeek's budget, it apparently cost DeepSeek just $5.58 million to train its DeepSeek V3 model, and the company reportedly had 50,000 Nvidia GPUs at its disposal; a respectable number but still very low when compared to major U.S. AI companies which reportedly have more than 10 times that number.
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Speaking at the World Economic Forum in Davos, Switzerland, on Wednesday, Microsoft's Satya Nadella said that DeepSeek should be taken "very seriously."
"To see the DeepSeek new model, it’s super impressive in terms of both how they have really effectively done an open-source model that does this inference-time compute, and is super-compute efficient," he said.
And investor Marc Andreessen called DeepSeek "one of the most amazing and impressive breakthroughs" he'd ever seen.
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What DeepSeek's rise means for the AI industry
If DeepSeek was indeed able to match the performance of OpenAI's best model on far less Nvidia GPUs and at a fraction of a cost, then the implications are that the demand for Nvidia GPUs, which is driving the company's stock price up, may go down in the future. More broadly, the entire AI market may be overblown, as seen by today's performance of AI-related companies.
Of course, it's never that simple. DeepSeek, an offshoot of Chinese AI-specialized hedge fund High-Flyer Quant, could actually be running more GPUs and train its models on a higher cost than is publicly known.
Furthermore, while the market obviously reacted poorly to the news, it is possible that DeepSeek tech could open up new possibilities in AI in the future, which in turn could once again spark another race to get as much AI hardware as possible.
It's also worth noting that DeepSeek is not the only new Chinese player in the space. ByteDance, parent company of TikTok, announced its Doubao-1.5-pro model yesterday, which also beats many top models in a number of benchmarks, though - in contrast to DeepSeek - Doubao is not available as open source.
It will likely take a while until the market absorbs all this news and its significance to the AI space; for now, though, the direction is down.
