Artificial intelligence stocks have produced solid gains for several years, but they recently hit a big bump in the road. DeepSeek, China’s AI app, was only produced with $6 million. This startling claim puts the billions of dollars spent on AI into question.
Many AI stocks depend on big tech companies having big budgets for AI initiatives, but if these companies can save 50%-90% on costs, it doesn’t spell good news for the companies that have profited the most from artificial intelligence.
Stocks like Nvidia (NASDAQ:NVDA) and Broadcom (NASDAQ:AVGO) are down by more than 10% upon the news. Is this the start of a big crash, or is it better to buy and hold for the long run? Here’s what investors should know about the sharp drop in AI stocks.
AI stocks like Nvidia and Broadcom have lost a lot of value upon DeepSeek’s cost savings. DeepSeek puts big AI budgets into question and can reduce profits for AI chipmakers. Artificial intelligence still remains ins strong demand, with the U.S. set to invest $500 billion and China investing $140 billion into the innovative technology.
Key Points
Trending Video
AI Spending Is Put into Question
Most of the high-flying AI stocks generate their revenue from a few big tech companies that pour billions of dollars into AI each year. However, DeepSeek’s ability to get a successful LLM app up and running with a $6 million budget throws a lot of questions about the costs of AI infrastructure.
Some people like Elon Musk and Alexandr Wang are both skeptical about the $6 million budget. However, any efforts that result in lower prices will put more pressure on the companies that have benefited the most from big budgets from the world’s leading tech giants.
The Timing of the DeepSeek Reaction Is Noteworthy
It’s hard to pinpoint the accuracy of the $6 million figure, and DeepSeek’s parent company has an incentive to disrupt the U.S. stock market. Quantitative hedge fund High-Flyer is DeepSeek’s parent company.
Some people are speculating that the firm could have short U.S. AI stocks before DeepSeek became a major news item. It would be advantageous for a hedge fund with a short position to say that it only costs $6 million to create DeepSeek.
The company launched Janus-Pro-7B as AI stocks were already taking a beating, leading to additional losses. The timing is convenient, and it also comes right before big tech companies report earnings. A sharp drop in tech stocks makes them available for a discount right before earnings at a time when headlines may cause retail investors to panic.
Investors should pay careful attention to those earnings reports and what executives at those companies say about DeepSeek and their AI budgets.
What to Do About AI Stocks
There are some doubts about the figure for $6 million. If this doubt grows and is verified, many AI stocks should soar. If the budget is accurate, it will boost demand for AI chips at the cost of profit margins.
Artificial intelligence is still an innovative industry. The United States and China are both pouring significant capital into AI software and infrastructure.
Now isn’t the right time to rush for the exits, as there are still many unknowns. However, the picture will become clearer this week as some of the top tech customers report earnings this week.
Get Ready To Retire (Sponsored)
Start by taking a quick retirement quiz from SmartAsset that will match you with up to 3 financial advisors that serve your area and beyond in 5 minutes, or less.
Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests.
Here’s how it works:
1. Answer SmartAsset advisor match quiz
2. Review your pre-screened matches at your leisure. Check out the advisors’ profiles.
3. Speak with advisors at no cost to you. Have an introductory call on the phone or introduction in person and choose whom to work with in the future
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.
Latest from 24/7
Our expert who first called NVIDIA in 2009 is predicting 2025 will see a historic AI breakthrough.
You can follow him investing $500,000 of his own money on our top AI stocks for free.