DeepSeek's AI Advancements Cloud the Picture as Big Tech Earnings Approach

The tech sector is bracing for a significant shake-up as DeepSeek, a Chinese AI startup, has released a large-language model (LLM) that outperforms OpenAI's latest model in many third-party tests. The model, called R1, was released last week and has sparked a wave of skepticism and excitement among tech investors. The news comes just in time for U.S. tech investors to pay particularly close attention to earnings season, which kicks off after the bell on Wednesday.



DeepSeek's model has raised concerns about the competitive moats of U.S. tech firms and the multi-billion dollar capex investments they have made in AI infrastructure. The startup was able to achieve similar performance to OpenAI and other AI systems using less sophisticated chips and at a fraction of the cost. This has led to questions about the sustainability of Big Tech's pricing power and revenue models as AI technology becomes more commoditized.



The news of DeepSeek's cost-efficient AI model has already sent shockwaves through the market, with Nvidia's stock price plummeting 17% on Monday. This could lead to increased scrutiny and potential compression of the valuations of Big Tech companies, which are currently trading at roughly 30x forward earnings. Investors will likely pay closer attention to the AI-related capital expenditures (capex) and research and development (R&D) spending by these companies in their upcoming earnings reports.

However, multi-year AI buildout plans are unlikely to turn on a dime, and we expect these intentions to be reiterated in earnings calls. Leading tech firms boast a robust earnings growth outlook, with analysts expecting Mag 7 profits to grow 23% y/y this quarter, compared to 10% for the rest of the index. Combined with robust infrastructure footholds and advanced R&D, these companies remain at the forefront of AI development and deployment.

In conclusion, DeepSeek's advancements have the potential to impact the competitive landscape and pricing power of U.S. tech firms in the AI sector by challenging their competitive moats and the multi-billion dollar capex investments they have made. However, these firms still maintain a strong earnings growth outlook and robust infrastructure footholds, which will help them remain competitive in the AI space. As Big Tech companies report their earnings in the coming weeks, investors will be closely watching their AI-related expenses and investments, as well as the potential implications for their competitive moats and revenue models.