Societe Generale Urges Shift to Secular Themes as DeepSeek AI Shakes U.S. Tech

Societe Generale, a leading European bank, has advised investors to shift their focus towards secular themes, citing the recent emergence of DeepSeek, a Chinese AI startup, as a potential disruptor to U.S. tech dominance. DeepSeek's cost-effective and open-source approach to AI development has raised concerns about the sustainability of U.S. AI capex and margins, as well as the potential implications for data center revenue and profit growth.

DeepSeek, founded in 2023 by Liang Wenfeng, a former chief of AI-driven quant hedge fund High-Flyer, has rapidly gained attention with its advanced AI models. The company's mobile app, released in early January, has topped iPhone charts across major markets, including the U.S., UK, and China. DeepSeek's models, such as the DeepSeek-R1, have demonstrated superior performance compared to prominent U.S. models like OpenAI's GPT-4 and Meta's LLaMA 3.1 in various benchmarks, including complex problem-solving, mathematics, and coding (Source: Bloomberg).

The success of DeepSeek has raised several pertinent questions, such as the sustainability of U.S. tech dominance and the cost debate surrounding AI development. By developing cutting-edge AI models with less advanced and more cost-efficient hardware, DeepSeek challenges the heavy investments U.S. tech companies are pouring into high-cost AI infrastructure. Reports suggest that DeepSeek-R1's API costs just $0.55 per million input tokens and $2.19 per million output tokens, compared to OpenAI's API, which costs $15 and $60, respectively (Source: Bloomberg).

DeepSeek's open-source strategy, which involves openly sharing its code and training methodologies, has also raised concerns about the competitive advantage of U.S. firms that rely on proprietary systems. This approach could drive faster innovation and broader adoption, potentially diminishing the competitive edge of U.S. firms (Source: Bloomberg).

The rise of DeepSeek has also raised questions about U.S. export controls and their effectiveness in limiting China's access to high-powered chips. If companies like DeepSeek can innovate despite sanctions, the narrative around China's technological dependence on the U.S. may shift dramatically, with potential implications for investor sentiment toward Chinese tech (Source: Bloomberg).

Wall Street analysts have expressed mixed views on DeepSeek's impact on U.S. AI capex and margins. Jefferies warns about potential negative implications for AI players, while Citi questions whether DeepSeek's achievements were made without advanced GPUs. Morgan Stanley suggests that if the reports are accurate, generative AI could eventually run on smaller devices (Source: Bloomberg).

In conclusion, Societe Generale's advice to shift towards secular themes is timely, given the emergence of DeepSeek as a cost-effective AI model that challenges the traditional capital-intensive approach of U.S. tech companies. Investors should monitor the sustainability of U.S. AI capex and margins, as well as the potential implications for data center revenue and profit growth, in light of DeepSeek's achievements. The geopolitical implications of this development, particularly regarding U.S. export controls and investor sentiment towards Chinese tech, should also be considered.