When the chips are down, it’s time to up the ante.
It’s been said that scared money never wins, but the tech sector got a fright worthy of a dozen horror flicks on Jan. 27 when the Chinese chatbot DeepSeek came bursting onto the scene like that nasty little critter from Alien.
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Semiconductor companies took a saber-toothed shellacking as DeepSeek’s makers said they had developed a large language model system for less than $6 million, a fraction of the costs born by U.S. giants such as OpenAI and Meta Platforms (META) , with performance benchmarks that are equal to or better than those of the leading chatbots.
DeepSeek’s AI Assistant quickly became the most downloaded free app in the U.S. on Apple’s (AAPL) App Store, dethroning OpenAI’s ChatGPT.
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AI chipmaker Sasquatch Nvidia (NVDA) got pummeled, with shares dropping 17% after DeepSeek debuted, wiping out $600 billion of the company’s value.
“The introduction of the DeepSeek app was a shot across the bow for all of the players in the AI space,” Penn Mutual Asset Management said. “While many of the details surrounding its R1 model remain murky and quite possibly exaggerated, it’s clear that there is an arms race of sorts in the AI space.”
But now is not the time to panic, Morgan Stanley analysts said on Feb. 6.
Nvidia CEO Jensen Huang has been contending with competition from Chinese chatbot DeepSeek.
Shutterstock
Analysts say Nvidia stock still top pick
The firm concluded that the DeepSeek selloff is a buying opportunity, and maintained Nvidia as a “Top Pick” with an overweight rating and $152 price target on the shares.
While Morgan acknowledged that DeepSeek creates some headwinds around export controls and longer-term investment and that sentiment on Nvidia has worsened around potential longer-term risks, the firm said that near-term checks are firming both for the company’s Hopper and “all flavors of Blackwell.”
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Talking to cloud contacts, the firm said that it is hearing that “none of this changes the plans of any of the major participants.”
Morgan said that Blackwell’s supply visibility continues to build and that customers’ desire to spend is “clearly on display.”
Meanwhile, Citi lowered the firm’s price target on Nvidia to $163 from $175 and kept a buy rating on the shares ahead of the company’s quarterly earnings report Feb. 26.
The firm said that it is modeling in-line results for the January and April quarters and believes expectations are for $38 billion to $42.5 billion sales for the quarters, respectively, given supply chain indications for the Blackwell to ramp more meaningfully in mid-2025 with some mix shift between GB200/300.
While noting that the stock has been range-bound since June 2024 due to declining gross margins, Citi said that it expects Nvidia’s gross margins to trough in the April quarter.
Nvidia shares got a boost when lawmakers introduced a bill that would ban DeepSeek’s chatbot application from government-owned devices over new security concerns that the app could provide user information to the Chinese government.
The bipartisan bill — written by Reps. Darin LaHood, an Illinois Republican, and Josh Gottheimer, a New Jersey Democrat — is similar to past legislation that banned TikTok from government devices, the Wall Street Journal reported.
The two are the top Republican and Democrat, respectively, on a House Select Committee on Intelligence subcommittee.
“This should be a no-brainer in terms of actions we should take immediately to prevent our enemy from getting information from our government,” Gottheimer said.
The chatbot app has intentionally hidden code that could send user login information to China Mobile, a state-owned telecommunications company banned from operating in the U.S., according to an analysis by Ivan Tsarynny, chief executive of Feroot Security.
Governments look to ban DeepSeek
“Our personal information is being sent to China, there is no denial, and the DeepSeek tool is collecting everything that American users connect to it,” Tsarynny told the Journal.
Related: Nvidia stock faces fresh China concerns
The analysis pushed LaHood and Gottheimer to develop the legislation.
“Under no circumstances can we allow a CCP company to obtain sensitive government or personal data,” said LaHood, referring to the Chinese Communist Party.
Some federal agencies, such as the U.S. Navy and the National Aeronautics and Space Administration, have blocked the app due to security and privacy concerns.
Texas was the first state in America to ban the chatbot on government devices, but it’s not just the U.S. looking to deep-six DeepSeek.
Governments across Asia, including South Korea and Australia, are restricting their use of DeepSeek’s artificial intelligence services due to security concerns, Nikkei Asia reported.
Australia’s Department of Home Affairs banned DeepSeek from government services, saying it posed “an unacceptable level of security risk.”
The department said government entities must manage the risk of DeepSeek’s “extensive collection of data” and “exposure of that data to extrajudicial directory from a foreign government that conflicts with Australian law.”
“Chinese EVs, security cameras, TikTok, and now DeepSeek show that we are playing whack-a-mole with new technology products and services from high-risk nations,” said an official at an Australian cybersecurity company.
Italy took similar steps last month.
Industry analysts have pushed back against DeepSeek’s low-cost claims, Reuters reported, with Bernstein’s Stacy Rasgon stating that “it seems like a stretch to think the innovations being deployed by DeepSeek are completely unknown by the top tier AI researchers at the world’s other numerous AI labs.”
Penn Mutual said that DeepSeek’s arrival does not appear to have changed the plans for U.S. technology companies to spend hundreds of billions of dollars on AI infrastructure in the coming years.
Microsoft (MSFT) , Meta, Alphabet (GOOGL) and Amazon (AMZN) accounted for $170 billion of capex spending — predominantly for AI infrastructure through the third quarter of 2024, up 56% from a year ago.
AI spending is expected to exceed a quarter trillion dollars in 2025, the firm said, and that number will likely be surpassed,
“Big tech players continually look for ways to optimize their models — and this may have been the shake-up that was needed for them to remain vigilant in their pursuit of attaining efficiencies — realizing that if they don’t find those efficiencies, someone else will,” Penn Mutual said.
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