The high multiples at which artificial intelligence (AI) companies trade reflect the high growth expectations in the sector. However, DeepSeek — the Chinese AI chat company created by the company of the same name — raises a crucial question: Is it necessary to allocate so much investment to AI infrastructure to achieve good results?

Recently, artificial intelligence has been the driving force of the stock markets, leading the S&P 500 to surpass 6,000 points, an increase of 58% from 3,800 points at the beginning of 2023 (see figure 1). The market has been optimistic about the value that AI can bring to optimizing value chains in various industries.

However, this optimism has been accompanied by criticism due to the high levels of valuation —in terms of P/E— of the main AI companies, comparing them with the DOTCOM bubble of 2001 (see image 2), a time when technology companies promised a lot and generated little. This comparison, at first glance, seems inappropriate, since current technology companies have good profitability . For this reason, the similarity alerts have dissipated over time, which does not mean that the investor has to be willing to pay any type of valuation to access this technology.

In 2024, despite being a good year for tech, the high level of CAPEX (expenditure on expansion and improvement of assets) allocated to the development of AI was questioned, with ROI ( Return on Investment ) as a key indicator in the results of the “big tech”: Amazon, Meta, Google, Apple, Microsoft, Tesla and NVDA. Investment in AI returned to the center of the debate when DeepSeek demonstrated that it can perform tasks with similar precision to ChatGPT, but at a significantly lower cost (see images 3, 4 and 5) . This caused a “deepselling” in the AI market on Monday, January 27.

It is crucial to investigate the veracity of DeepSeek ’s reported costs, as, being a private Chinese company, it is not obliged to disclose balance sheets or operational details . Although they claim to operate with ~2,000 Nvidia H800 GPU chips, the use of the latest NVDA H100 technology, not legally available for export to the Asian Giant, cannot be ruled out.

The Chinese origin of this technology may also affect international relations, especially with Donald Trump fervently protecting the interests of the United States . This milestone could generate —in the medium term— more commercial restrictions on the hardware industry by the United States towards China (in addition to those put in place at the time by former President Joe Biden).

DeepSeek ’s disruption has raised questions among investors about the sustainability of AI CAPEX and the need for expensive processors for today’s chatbots . With the US corporate earnings season underway, big tech ’s results will be under increased scrutiny.

While this may add short-term volatility to equity indices—S&P 500 and Nasdaq, primarily—we believe that, in the long term, the cost reductions brought about by DeepSeek will increase demand and competition, generating new services and making supply chains more efficient across a variety of industries .

DISCLAIMER

Tomas Fernandez

Discretionary Portfolio Analyst