History consistently demonstrates an unblemished knack for identifying the forthcoming revolutionary technologies, with DeepSeek being a prime example.
Over the last two-and-a-half years, Wall Street's stock market rally has seen unwavering success. Despite numerous factors propelling this momentum, none has been more influential than the artificial intelligence (AI) revolution. This technological advancement allows software and systems to become increasingly proficient in their tasks and acquire new skills without human intervention, revolutionizing industries worldwide.
The global market potential of AI is staggering, as cited in PwC's report, "Sizing the Prize." By 2030, productivity gains due to AI are projected to boost global GDP by $6.6 trillion, while $9.1 trillion in consumer-side effects will be added, lifting the total GDP by 26%.
Among the numerous stocks that have benefited from this AI revolution, none has prospered as directly as semiconductor giant, Nvidia (NVDA 2.87%). However, like other rising tech stars, Nvidia's ascension has not gone unnoticed, and investors are well-aware of its history of bursting "next-big-thing" bubbles.
Nvidia's historic rise
To begin 2023, Nvidia was on the cusp of becoming a prominent technology player worth $360 billion. Its recognition primarily stemmed from graphics processing units (GPUs) used in personal computers and cryptocurrency mining. A pivotal shift came with the production of GPUs for high-compute data centers, catapulting Nvidia into an unprecedented position of dominance.
The company's Hopper (H100) chip and Blackwell GPU architecture have become the preferred AI solutions for businesses seeking to implement generative AI solutions and build/train large-scale language models. As demand for these chips escalates, so do their prices. In fact, Nvidia charges thousands of dollars for its Hopper chips, eclipsing competitors' offerings by more than double [1].
The arrival of DeepSeek
On January 27, 2023, AI-focused investors received an unexpected jolt. The Nasdaq Composite plummeted substantially, with tech stocks — including those boasting AI capabilities — dragging down the broader market. The main culprit behind this fallout was an AI-driven app called DeepSeek and its open-source large language model (LLM) similar to OpenAI's ChatGPT.
Concerns over DeepSeek's LLM revolve around training costs and computational efficiency [2]. If DeepSeek's claims about training its LLM with less-powerful GPUs for a significantly lower cost than corporations like Microsoft, Meta Platforms, Amazon, and Alphabet prove accurate, it could potentially disrupt the AI hardware market by reducing the demand for high-end GPUs, such as Nvidia's.
Regardless of the validity of DeepSeak's claims, it serves as a cautionary reminder of the inevitability of competition in the AI space. If Nvidia's GPUs maintain their computing advantage for an extended period, the minimization of AI-GPU scarcity and subsequent price reductions would deplete profits gained from their current pricing power and high gross margins [1].
The broader concern behind the DeepSeek saga revolves around its implications for the larger AI industry. Technology bubbles are an integral part of market history, evolving, and eventually maturing. Historically, investors have overestimated the early adoption rate and utility of trends such as the internet, blockchain technology, and cryptocurrencies.
DeepSeak's rapid success is a clear demonstration that businesses are rapidly incorporating AI into their operations, but many fail to have a clear strategy for monetizing their investments. Unless companies can account for how they plan to capitalize on their AI investments, it is challenging to avoid the implosion associated with the technology bubble.
In conclusion, the rise of companies like DeepSeak and the proliferation of open-source LLMs pose both opportunities and challenges for AI giants like Nvidia. While they add competition and create potential regulatory concerns, they also drive innovation, cost-effectiveness, and democratize access to AI technology, potentially shaping the AI industry's future.
Enrichment Data:
- Business Insider
- TechCrunch
- IPWatchdog
- Bloomberg
- Barron's
In light of DeepSeak's AI-driven app and open-source large language model, investors are now questioning Nvidia's pricing strategy for its high-end GPUs. If DeepSeak's claims about training LLMs with less power and cost prove accurate, it could significantly impact Nvidia's demand and profit margin in the AI hardware market.
Moreover, the success of companies like DeepSeak highlights the importance of monetizing AI investments for tech giants. Without a clear strategy for capitalizing on their AI investments, companies risk falling into the trap of technology bubbles and eventual market implosions.
