February 2025
DeepSeek says its model rivals the most advanced offerings from US firms like OpenAI and Alphabet, yet it was reportedly developed at a fraction of the cost and with limited access to high-end GPUs (graphics processing units). We believe the announcement sent shares of AI-related companies, most notably Nvidia, lower, as investors weighed the implications of DeepSeek’s efficiency, and its lower reliance on Nvidia’s latest chips.
Near-term volatility may not negate long-term growth
AI-related stocks are likely to remain volatile in the near term. “The nature of new technologies is that there are many developments, and often in rapid succession,” says Eric Hundahl, Head of the BNY Investment Institute. Adding to this, the elevated valuations of many AI players, particularly in the US, might have made investors highly sensitive to AI headlines.
Looking beyond the near-term turbulence, Hundahl sees cost reductions and efficiency gains as long-term tailwinds for AI.
“History has shown that when barriers to entry are lowered, industries expand and thrive,” he explains. “At the start of the internet age, a few dominant players, like AOL, Microsoft, and Netscape controlled the space.
The dominant players have changed. But overall, as costs declined and accessibility improved, the ecosystem grew stronger, supporting a much broader range of companies. AI is likely to follow a similar path.”
AI demand and semiconductor implications
Looking ahead, our partners at Walter Scott, the international equity specialists within BNY Investments, anticipate AI adoption to accelerate over time. The release of DeepSeek’s model could hasten AI’s commoditization and intensify competition, in their view.
As noted, semiconductor stocks, particularly those supplying AI infrastructure, were among the hardest hit following the DeepSeek news. In the near term, broader semiconductor demand could be impacted. However, Walter Scott analysts point to Jevons Paradox which says that as technology costs decline, adoption rises, potentially fueling greater demand: “We expect this paradox to hold for AI: lower costs should drive faster and broader adoption, leading to increased demand for semiconductors.”
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