This week’s $1trillion technology stock rout may now seem an overreaction. But although the mood has calmed, investors are questioning their previous assumptions about the best ways to back the artificial intelligence (AI) revolution.
A fortnight ago, holding stakes in the Magnificent Seven of tech – Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla – seemed to be the only way to back this seismic change.
But the conviction that the hegemony of these companies was unassailable has been shaken by the emergence of DeepSeek.
This ‘open-source’ – free – Chinese generative AI system was created by founder Liang Wenfeng for a mere £4.8m, or so it is claimed, with limited reliance on Nvidia’s microchips.
DeepSeek may have its shortcomings, but it aspires to rival the ChatGPT system from Microsoft-backed Open AI.
The latest version of Chat GPT is said to have cost nearly £63m, although a great deal more has been spent on this venture.
Debut: DeepSeek founder Liang Wenfeng created the AI with less than £5m
The unnerving suggestion that splashing out on huge amounts of Nvidia’s wares was not necessarily vital caused the giant’s market capitalisation to shed about £474bn. The shares tumbled by 17 per cent.
Also hit were a broad range of US and European stocks seen as the beneficiaries of unbridled expenditure on every aspect of AI, including the Dutch semiconductor maker ASML, Dell Technologies, which makes servers, and Siemens – the energy production equipment supplier.
DeepSeek is said to require only 5 to 12 per cent of the energy required by state-of-the-art systems.
This sell-off caused Nassim Nicholas Taleb, author of the influential Black Swan – a treatise on unpredictable occurrences – to predict further turmoil.
However, the investment bank UBS told its clients this week: ‘AI is here to stay, and if anything, DeepSeek reinforces that.’
Stephen Yiu, manager of the Blue Whale fund, commented: ‘Some investors have taken fright this week. I am instead energised by the latest development. It won’t be the last.’
But although the panic has lessened amid the realisation that there will be a clientele for budget-conscious and more lavish AI systems, the DeepSeek revelation is a signal to reassess the contents of your portfolio.
This is not the moment to shun Big Tech stocks. But it may be appropriate to consider spreading your cash differently and readying yourself for more volatility.
PREPARE FOR MORE CHANGE
Mark Hawtin, of Liontrust Global, argues that this is a moment of ‘disruption and innovation’. David Coombs, of Rathbones, expounds the same theory, saying that access to AI will be ‘democratised’, with all kinds of companies able to embed the technology into their operations for less outlay, customising the technology as they wish. This implementation will also be more sustainable since less energy is involved. Hawtin cites the Jevons Paradox, cited by the 19th century economist Williams Jevons who observed that as steam engines became more efficient, coal consumption grew rather than diminished.
Hawtin says: ‘As AI gets more efficient and accessible, we could likely see it sky-rocket and turn into a commodity.’
Satya Nadella, Microsoft’s chief executive, is of the same view. Well, at least, that’s what he told his 3.3m followers on X, formerly known as Twitter.
Unveiling the company’s first quarter results, Nadella said: ‘Open AI has a lot more coming soon, so stay tuned.’
Nadella may also be comforted by the view that while some users will opt for inexpensive DeepSeek, others will fear the possible close links between this venture and the Chinese state.
Against this background, Chat GPT will be viewed as reassuringly expensive at an edgy geopolitical time.
SPREAD YOUR RISK INTO SOFTWARE
If AI becomes more accessible and affordable, this should mean more clamour for the services of software groups. Coombs cites Adobe, which writes programmes for art, advertising and design businesses. Its shares stand at $443, but brokers’ analysts have set an average target of $573.
Even before DeepSeek burst on to the public consciousness, Marc Benioff, boss of Salesforce – which specialises in customer relationship management software – said: ‘You’re just seeing the very beginning of what will be one of the biggest investment levels in the history of the world.’
Brokers seem to share Benioff’s optimism since they have set an average target price for the Salesforce shares of $395, against the current $342.
Dominik Asam, chief financial officer at Sap, the German software colossus, contends that DeepSeek could prove a boon.
The shares have advanced by 40 per cent over the past six months to €267, but this week UBS set a new target of €300.
BUT DON’T TURN YOUR BACK ON BIG TECH
The share prices of the members…
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