Markets Overreacting to DeepSeek AI or Big Tech 'Stretched'?

The recent revelation of DeepSeek AI, a Chinese startup that developed a ChatGPT-like AI model at a fraction of the cost of U.S. competitors, has sent shockwaves through the tech industry and global markets. On Monday, January 28, 2025, U.S. stocks dropped sharply, with the tech-heavy Nasdaq plunging by 3.1% and the broader S&P 500 falling 1.5%. The Dow, boosted by health care and consumer companies, was up 0.7% (CNN, 2025). This reaction raises the question: are markets overreacting to DeepSeek AI, or is Big Tech 'tretched'?



DeepSeek AI's Achievements and Market Reaction
DeepSeek AI, a one-year-old startup, presented a ChatGPT-like AI model called R1, which operates at a fraction of the cost of OpenAI's, Google's, or Meta's popular AI models. The company spent just $5.6 million on computing power for its base model, compared to the hundreds of millions or billions of dollars spent by U.S. companies (Source: CNN). This stunning achievement sent shockwaves through markets, particularly the tech sector, on Monday. Nvidia, the leading supplier of AI chips, fell nearly 17% and lost $588.8 billion in market value, more than doubling the previous record of $240 billion set by Meta nearly three years ago (Source: CNN).



Big Tech's AI Investments and Valuations
Big Tech companies have been investing heavily in AI development. Meta last week said it would spend upward of $65 billion this year on AI development. Sam Altman, CEO of OpenAI, last year said the AI industry would need trillions of dollars in investment to support the development of in-demand chips needed to power the electricity-hungry data centers that run the sector's complex models (Source: CNN). However, these investments have led to high valuations for Big Tech companies, with some stocks trading at elevated multiples relative to their earnings.



Are Markets Overreacting?
The market's reaction to DeepSeek AI could be seen as an overreaction, given that the company's achievements are still relatively unproven. While DeepSeek has demonstrated impressive results, it remains to be seen whether its AI models can maintain their performance and scalability in the long run. Additionally, the geopolitical dynamics between the U.S. and China could impact the adoption and impact of DeepSeek's AI technology on global markets.

On the other hand, Big Tech companies' high valuations and significant investments in AI could be seen as a sign that they are 'tretched.' The market's reaction to DeepSeek AI could be a wake-up call for Big Tech companies to reassess their AI strategies and ensure they are investing wisely in the face of increased competition.

Conclusion
In conclusion, the market's reaction to DeepSeek AI has raised questions about the future of AI development and the competitive landscape in the tech industry. While some may argue that markets are overreacting, others could see this as a sign that Big Tech companies are 'tretched' and need to reassess their AI strategies. As the AI landscape continues to evolve, investors should stay informed and adapt to the ever-changing dynamics of the tech sector.