What does DeepSeek mean for the stock market?

A Chinese company called DeepSeek has caused havoc on the stock market after its R1 AI model topped performance charts despite its low cost.

| More on:
Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Parts of the stock market, notably those with exposure to artificial intelligence (AI), experienced considerable downward pressure on Monday (27 January). The reason behind this is DeepSeek, a Chinese lab, shocked the tech world after producing a large-language model (LLM) or advanced reasoning model, called DeepSeek R1.

This model delivered comparable performance to the world’s best chatbots at seemingly a fraction of the cost. And over the weekend it was downloaded more than ChatGPT.

How DeepSeek shocked tech

DeepSeek-R1’s an open-source model with comparable performance to Western AI systems like ChatGPT. The model’s success has sparked concerns about the future dominance of US tech giants, causing a sell-off of US tech stocks. This development’s seen as a potential equaliser in the AI field, particularly benefiting researchers and developers with limited resources.

Diving deeper, DeepSeek-R1 impresses because of its cost effectiveness. Trained for just $5.6m, it operates at 95.3% less cost than Anthropic’s Claude 3.5 Sonnet and charges users only 2% of OpenAI’s O1 model rates. Its four-stage training process, including large-scale reinforcement learning on reasoning problems, has achieved O1-level performance at a fraction of the cost of its peers.

However, there’s another angle. DeepSeek R1’s claimed to be built on “less advanced” or “last generation” Nvidia GPUs (Graphics Processing Units), in line with export controls on the most advanced chipsets.

Some analysts are questioning whether this is possible and it may be a matter of time before we find out more. DeepSeek published its methodology, meaning it can be copied and evaluated. Some analysts suggest that China has evaded export restrictions and R1 could have been built on higher-end chips.

What does this mean for tech?

This development challenges the assumption that cutting-edge AI requires massive investments in advanced hardware and infrastructure. In addition to companies like Nvidia, stocks in the data centre segment have taken the biggest hit. These are the firms responsible for building the AI infrastructure that the sector has been clamouring for over the past year. This includes rack-scale providers, cooling companies and those in networking.

As I write, Celestica‘s (NYSE:CLS) among the hardest hit stocks. Sadly, it’s one of my favourites with a price-to-earnings-to-growth (PEG) ratio consistently under one. Celestica’s a leading provider of electronic manufacturing services (EMS) and operates multiple manufacturing facilities worldwide. The company specialises in producing complex electronic components and systems for various industries.

Celestica’s business model heavily relies on serving large technology companies, particularly hyperscalers like Amazon and Google who are investing heavily in AI and data centres. In Q3 2024, hyperscaler revenue increased 54% to $761m, accounting for 30% of total revenue. Thus, if we’re seeing a massive breakthrough in AI cost-efficiency, Celestica may see a slowdown in sales growth.

However, there’s certainly a possibility all of this is being overplayed. After all, greater LLM efficiency combined with the rapid expansion of data centres could represent another quantum leap forward for AI, making it more accessible and compounding performance gains. Moreover, cheaper AI should hasten its adoption, particularly among SMEs and the broader market. This could become apparent in the coming months.

I may have considered buying more Celestica, but it’s already my largest holding by some distance. I don’t want to become over-concentrated.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. James Fox has positions in Celestica Inc and Nvidia. The Motley Fool UK has recommended Alphabet, Amazon, and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Caucasian woman with pink her studying from her laptop screen
Investing Articles

Time to buy Nvidia shares before fresh all-time highs?

Nvidia shares began 2025 at an all-time high before a big drop in the last week or two. Our writer…

Read more »

Investing Articles

A top FTSE 100 share to consider for a Stocks and Shares ISA starter portfolio!

While not without risk, a lump sum in this FTSE 100 trust could prove a great way for Stocks and…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

I asked ChatGPT to name the best 5 UK shares to build wealth over 50 – and here they are!

Harvey Jones is looking to build a balanced portfolio of UK shares to fund his final years, and asked ChatGPT…

Read more »

Investing Articles

£10k invested in Scottish Mortgage shares after the DeepSeek crash is now worth…

Harvey Jones thought his Scottish Mortgage shares were heading for a bumpy ride when DeepSeek emerged last month. Then he…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

1 ex-penny stock up nearly 400% in my Stocks and Shares ISA! 

This writer is starting to take notice of a small-cap stock that is 'up' significantly in his ISA portfolio over…

Read more »

Investing Articles

The FTSE 100 index hits new highs! But will Legal & General shares outperform it in 2025?

Legal & General's share price has rocketed almost 8% so far in 2025. Can it continue to outstrip the surging…

Read more »

Investing Articles

Up another 8% in a week! So what’s stopping me from buying IAG shares? 

Harvey Jones is desperate to add high-flying IAG shares to his portfolio before they climb even higher but there's a…

Read more »

Happy couple showing relief at news
Investing Articles

The Bank of England’s slashed its growth forecast but the FTSE 100 doesn’t seem to care!

On the day the UK’s central bank halved its forecast for growth in 2025, the FTSE 100 reached a record…

Read more »