mtx Equities
Seeking to invest in leading businesses with high and growing profitability, leading industry positioning and strong sustainability characteristics in emerging markets, Asia and China.
DeepSeek’s strong new AI model – AI’s Sputnik moment?
Conviction Equities Boutique
Shares in Nvidia and ASML have plummeted due to concerns that Chinese AI startup DeepSeek's new model could disrupt the current AI business model. DeepSeek's R1 model, released on January 20, exhibits performance similar to top US large language models (LLMs), but at a fraction of the cost. This has sparked concerns about the need for high-end chips and computing power. The development suggests Chinese AI engineers have found a way to work around US-led export bans on advanced semiconductor technologies.
Technological advancement shows much higher cost efficiency is possible, but we doubt this will cause slowdown in investments just yet
The astonishing performance of DeepSeek's model is mainly due to a combination of architectural optimizations such as Mixture-of-Experts design and custom communication schemes between chips. This technological advancement shows that much higher cost efficiency is possible in AI development. However, this is unlikely to cause a slowdown in overall AI investments just yet, as the race towards Artificial General Intelligence (AGI) is in full swing. Meta recently announced over 50% growth in capital expenditures on AI projects in 2025, and Project Stargate from OpenAI/Oracle/Softbank revealed during the World Economic Forum is expected to be worth $500 billion.
Sanctions look ineffective, what will likely provoke further tightening
Despite the US's efforts to stall China's progress in AI through export restrictions, these sanctions appear to be ineffective. DeepSeek states it used Nvidia H800 chips for training, a down-spec'ed version of the H100 for the Chinese market. But it's unclear if H100 chips bought prior to the restrictions were involved, or if the company leased more high-end chip capacity from data centers in South East Asia. The Biden administration's recently proposed tightening of export restrictions would address the latter, and further tightening of restrictions is likely.
Investment implications: AI arms race to continue with growing cost-effectiveness considerations
The investment implications of these developments are significant. The strong Q4 performance in tech hardware was mainly driven by more cost-effective custom AI chip demand, as demonstrated by Amazon. The DeepSeek revelations support the expectation for a continued drive for cost efficiency. However, with high expectations comes increased vulnerability, what lead us to a reduction in hardware exposure into 2025. So now with increased scrutiny on the sustainability of high AI infrastructure investments we expect some initial hit on the hardware stocks, but would perceived this as a buying opportunity as the improved cost-efficiency should ultimately boost the adoption of AI applications and benefit a wider tech supply chain.
Chinese internet companies' ability to succeed in AI development despite sanctions is supported by the news. Lower training and inference costs should generally support faster adoption and monetization of AI solutions. Investors may start to see value in diversifying their portfolios beyond the US-centric stocks and considering equities in markets like China, where companies are making significant strides in sectors like AI, despite regulatory challenges and while US leader’s barriers to entry are put more into question. This could mark a significant shift in investor sentiment, with emerging markets again becoming increasingly competitive and attractive for investment.
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