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What DeepSeek’s Technology Could Mean for Tech Stocks

Chinese artificial intelligence startup DeepSeek rattled the U.S. technology sector after the company recently unveiled an AI model that is competitive with leading U.S. models — but is potentially much cheaper to build and much more efficient. The S&P 500 has rallied more than 20% in back-to-back years, and one of the driving forces of that rally has been surging AI stocks. However, AI chipmaker Nvidia Inc. (ticker: NVDA) and other AI technology stocks took a big hit following the DeepSeek news, which shook investor confidence in the U.S. AI bull thesis.

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Here’s what every investor should know about DeepSeek and how it could impact the markets in 2025 and beyond:

— What is DeepSeek?

— DeepSeek’s impact.

— Will American AI companies stay competitive?

— Investing in Chinese AI stocks.

— The best way to invest in AI.

What Is DeepSeek?

DeepSeek is a Chinese AI startup that was founded in May 2023. In December 2024, the company launched a free, open-source large language model. The company claimed at the time that it built the model in just two months at a cost of only $6 million.

However, the market shock came after DeepSeek released its R1 reasoning model on Jan. 20. The updated DeepSeek model has outperformed OpenAI’s current o1 model in several third-party tests, suggesting U.S. tech giants like Microsoft Corp. (MSFT) and Alphabet Inc. (GOOG, GOOGL) may have made costly mistakes in developing their models. For example, OpenAI CEO Sam Altman has said the company spent “over $100 million” developing its GPT-4 model.

The key to DeepSeek’s success is reportedly the structure of its AI model, which emphasizes software-driven optimization over sheer hardware power. DeepSeek reportedly uses tens of thousands of Nvidia’s AI graphics processing units to train its models. However, the U.S. banned export of these AI chips to China in September 2022, forcing DeepSeek and other AI technology companies to adapt their models to focus on memory optimization, data transfer efficiency and innovative communication schemes among their chips.

In a nutshell, DeepSeek appears to be much cheaper to build and use than its American counterparts without sacrificing performance. DeepSeek-R1 costs just 55 cents per million input tokens and $2.19 per million output tokens. Meanwhile, OpenAI’s models reportedly cost $15 per million input tokens and $60 per million output tokens.

DeepSeek’s Impact

Given its stellar performance, it’s not surprising DeepSeek’s free mobile app quickly unseated OpenAI’s ChatGPT app as the most-downloaded free app in the U.S. on Apple’s App Store.

DeepSeek headlines also crushed U.S. AI technology stocks, many of which had generated huge returns in the past two years. Shares of leading AI chipmaker Nvidia dropped 17% in the first day of trading following the DeepSeek news, wiping out $590 billion in market cap in a single day — the largest one-day drop in market value for a single company in stock market history.

Shares of AI semiconductor stocks Marvell Technology Inc. (MRVL), Broadcom Inc. (AVGO), Micron Technology Inc. (MU) and others dropped sharply as well. Shares of AI energy and data companies such as Oracle Corp. (ORCL), Vertiv Holdings Co. (VRT) and NuScale Power Corp. (SMR) also initially plummeted as Wall Street digested the idea that the world may now take a smarter approach to AI development rather than a brute force approach that requires massive amounts of money and hardware.

Will American AI Companies Stay Competitive?

Google, Microsoft and other large U.S. tech companies have more than their pride at stake when it comes to competing with DeepSeek. Prior to DeepSeek’s latest release, the general consensus on Wall Street was that U.S. tech companies had a commanding lead in the global AI technology arms race. DeepSeek has seemingly opened the world’s eyes to the possibility that China is, at the very least, among the leaders in this critically important technology arms race.

[READ: 6 of the Best AI ETFs to Buy for 2025]

Fortunately for these U.S. companies, DeepSeek’s model is open-source, meaning researchers, developers and competitors can access the model’s underlying code.

Lars Nyman, chief marketing officer at CUDO Compute, says U.S. AI players will likely be forced to adapt.

“Some ‘borrowing’ from the groundbreaking discoveries will undoubtedly be taking place here. As for whether AI companies will remain competitive — they’ll stay competitive but not unscathed,” Nyman says.

Jean-Baptiste Wautier, financial and global economic policy leader at Wautier Family Office, says big U.S. technology companies will likely maintain their leadership position in AI. However, the value the market assigns to that leadership could change now that DeepSeek has proven these companies may not have as wide of an AI moat as it seemed.

“If this trend continues, it may lead to a reevaluation of stocks currently heavily dependent on AI for growth, particularly those positioned as industry champions,” Wautier says. “It also raises the broader question of how much real value can be generated from the AI revolution if prices keep dropping.”

Investing in Chinese AI Stocks

With U.S. AI stocks taking such a beating in the wake of the DeepSeek news, it’s only natural for investors to wonder if there may now be opportunities to invest in Chinese AI stocks.

DeepSeek is a private company, so investors can’t buy shares directly unless it completes an initial public offering at some point. However, the DeepSeek news has triggered a rally in other AI-linked Chinese tech stocks, including Alibaba Group Holding Ltd. (BABA), Baidu Inc. (BIDU) and VNET Group Inc. (VNET).

Unfortunately, investing in Chinese companies isn’t quite as straightforward as it may seem.

David Materazzi, CEO of Galileo FX, says investors should approach U.S.-listed Chinese stocks with caution.

“Investing in China was very popular a few years ago, but a lot of people got burned,” Materazzi says.

He says Americans must understand China has a different business culture and different national priorities than the U.S. does, and those differences can have a major impact on how Chinese stocks perform.

In recent years, the Chinese government implemented regulatory crackdowns that wiped more than $1.1 trillion off of the collective market caps of big Chinese tech companies. Alibaba and Tencent’s share prices dropped more than 75% during the worst of the crackdown. China has implemented similar crackdowns on casino stocks and education stocks as well.

Over the past five years, the crackdowns have completely undermined the Chinese stock market as a whole. In that five-year stretch, the SPDR S&P 500 ETF Trust (SPY) has generated a total return of roughly 100%, while the iShares China Large-Cap ETF (FXI) had a 12.5% loss on a total return basis.

In addition, U.S. regulators have threatened to delist Chinese stocks that don’t comply with strict accounting rules, inserting another risk into the equation. It’s difficult for U.S. investors to verify any news and accounting that comes out of China, and some industry insiders are skeptical of DeepSeek’s claims. Anthropic cofounder and CEO Dario Amodei has hinted at the possibility that DeepSeek has illegally smuggled tens of thousands of advanced AI GPUs into China and is simply not reporting them. Elon Musk, who founded xAI, said DeepSeek is “obviously” lying about its resources.

But even if U.S. investors take DeepSeek at its word, tensions between the U.S. and China are high. President Donald Trump made a trade war with China a centerpiece of his first term in office, and he has threatened to impose a 60% tariff on all imported goods from China during his second term.

“So there’s a geopolitical and political risk to investing in China. Don’t forget it,” Materazzi says.

The Best Way to Invest in AI

If nothing else, the DeepSeek news has underscored just how unpredictable the AI technology arms race can be. Even industry leaders like Nvidia aren’t immune to large sell-offs, and nobody can predict which company will report the next breakthrough. There are plenty of excellent AI stocks out there to buy, but buying individual stocks in a cutting-edge market like AI is always somewhat of a gamble.

AI investors can use the power of diversification to help reduce risk. For example, the Global X Artificial Intelligence & Technology ETF (AIQ) has more than 80 stock holdings of companies focused on AI and big data. The Global X Robotics & Artificial Intelligence ETF (BOTZ) holds 47 stocks of companies positioned to benefit from the adoption of automation, robotics and AI.

These types of thematic AI exchange-traded funds are designed to allow investors to capture all the AI sub-themes without the inherent risk of picking individual AI stock winners and losers.

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What DeepSeek’s Technology Could Mean for Tech Stocks originally appeared on usnews.com

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