NEW YORK/LONDON/SINGAPORE — Global investors dumped tech stocks on Monday (Jan 27) as they worried that the emergence of a low-cost Chinese artificial intelligence model would threaten the dominance of AI leaders like Nvidia, evaporating US$593 billion (S$802 billion) of the chipmaker's market value, a record one-day loss for any company on Wall Street.

Last week, Chinese startup DeepSeek launched a free AI assistant that it says uses less data at a fraction of the cost of incumbent services. By Monday, the assistant had overtaken US rival ChatGPT in downloads from Apple's app store.

This led the tech-heavy Nasdaq to fall 3.1 per cent on Monday. Nvidia was the Nasdaq's biggest drag, with its shares tumbling just under 17 per cent and marking a record one-day loss in market capitalisation for a Wall Street stock, according to LSEG data.

Nvidia's market-cap loss on Monday was more than double the previous one-day record, set by Nvidia last September.

The Nasdaq's next-biggest drag was chipmaker Broadcom Inc, which finished down 17.4 per cent, followed by ChatGPT backer Microsoft, which fell 2.1 per cent and then Google parent Alphabet, which ended down 4.2 per cent.

The Philadelphia semiconductor index tumbled 9.2 per cent, for its biggest percentage drop since March 2020 and its biggest decliner was Marvell Technology, which tumbled 19.1 per cent.

US equity declines followed a selloff that started in Asia, with Japan's SoftBank Group finishing down 8.3 per cent, and moved through Europe where ASML fell 7 per cent.

"If it's true that DeepSeek is the proverbial 'better mousetrap,' that could disrupt the entire AI narrative that has helped drive the markets over the last two years," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

"It could mean less demand for chips, less need for a massive build-out of power production to fuel the models, and less need for large-scale data centres."

The hype around AI has powered a huge inflow of capital into equities in the last 18 months, inflating valuations and lifting stock markets to new highs.

As recently as Wednesday, US AI-related stocks had rallied sharply after President Donald Trump announced a private-sector plan for what he said would be a US$500 billion investment in AI infrastructure through a joint venture known as Stargate.

Since then, SoftBank announced a US$19 billion commitment to help fund the Stargate venture whose other backers include ChatGPT developer OpenAI and Oracle, whose shares finished down 13.8 per cent on Monday.

Trump on Monday said that DeepSeek should be a "wakeup call" and could be a positive development.

In their flight from risk on Monday, investors sought out safe-haven government bonds and currencies. The benchmark US Treasury 10-year yield fell to 4.53 per cent while in currencies Japan's yen and the Swiss franc rallied against the US dollar.

The increased volatility in tech stocks will prompt banks to adjust their risk management, potentially holding fewer shares or managing positions more carefully as clients unwind their holdings, said one trading executive who declined to be identified discussing his company's actions.

Deepseek 'Sputnik moment'

After the release of the first Chinese ChatGPT equivalent, made by search engine giant Baidu , there was widespread disappointment in China over the gap in AI capabilities between US and Chinese firms.

But the apparent quality and cost-efficiency of DeepSeek's models changed this view, with Silicon Valley executives showering praise on DeepSeek-V3 and DeepSeek-R1.

Little is known about the Hangzhou startup behind DeepSeek, whose controlling shareholder is Liang Wenfeng, co-founder of quantitative hedge fund High-Flyer, based on records.

Its researchers wrote in a paper last month that DeepSeek-V3 model, launched on Jan 10, used Nvidia's lower-capability H800 chips for training, spending less than US$6 million.

DeepSeek-R1, released last week, is 20 to 50 times cheaper to use than OpenAI's o1 model, depending on the task, according to a post on DeepSeek's official WeChat account.

Marc Andreessen, the Silicon Valley venture capitalist, said in a post on X on Sunday that DeepSeek's R1 model was AI's "Sputnik moment," referencing the former Soviet Union's satellite launch that marked the start of the space race in the late 1950s.

"DeepSeek R1 is one of the most amazing and impressive breakthroughs I've ever seen — and as open source, a profound gift to the world," he said in a separate post.

However, Daniel Morgan, senior portfolio manager at Synovus Trust Company, which owns almost a million Nvidia shares, called Monday's selloff an over-reaction.

Morgan said that because DeepSeek's AI model is for use on mobile phones and PCs rather than data centres, it competes with ChatGPT, Meta Platforms and Alphabet's Gemini.

"The real money in AI is providing the chips for the data centres from the likes of (Nvidia), Advanced Micro Devices and Broadcom," said Morgan. "Overall, I view the AI tech selloff today as an opportunity to add high-quality tech shares on weakness."

Still, Nvidia fell US$24.20 on Monday to end at US$118.42. The stock, now down 11.8 per cent for the year to date, rose 171 per cent in 2024 and about 239 per cent in 2023 to trade at 56 times the value of its earnings as investors saw it as the best way to bet on the emergence of AI technology. Nvidia shares were up 2.5 per cent in after-hours trading on Monday.

Among other stocks, Vertiv Holdings, which builds data centre infrastructure, slumped 29.9 per cent on Monday.

Investors also sold off shares of power utilities, which had recently rallied sharply on hopes for a massive demand surge from power-hungry data centres needed for AI.

Vistra shares fell 28.3 per cent while Constellation Energy shares fell 20.8 per cent and NRG Energy lost 13.2 per cent.

Source: Reuters