DeepSeek AI Breakthrough Triggers Market Volatility

Summary

• The announcement of DeepSeek’s cost-efficient AI capabilities sparked market fears, pushing down the Nasdaq by 2.7% and impacting a wide range of stocks.
• Alpha Picks’ AI infrastructure stocks suffered as investors worried about reduced data center growth. However, investors should remain focused on long-term fundamentals rather than short-term reactions.
• It is also important to note that AP infrastructure stocks are well-diversified across products and services, buffering the impact of the current AI-related volatility.
• Despite the selloff, which included Celestica Inc. (CLS), Twilio (TWLO) extended Friday’s gains, totaling +20% for the five-day period, on investor confidence in its operating model.
• Since inception, the Alpha Picks Portfolio Total Return has delivered an impressive +186% versus the S&P 500’s +61%.

DeepSeek Catalyzes Market Selloff

Fellow Alphas,

A significant market selloff occurred this morning, triggered by news that the Chinese AI company DeepSeek has developed capabilities that match leading U.S. generative AI offerings while using fewer specialized chips. The DeepSeek App was launched last week. It is powered by the DeepSeek-V3 model, which its researchers claim was developed for less than $6M, significantly less than the billions invested by DeepSeek’s U.S. counterparts. Other players in the AI space have disputed this claim. The Nasdaq Composite (COMP:IND) was down 2.7% overall, while chip hegemon Nvidia (NVDA) dropped more than 15% by mid-day trading on Monday, January 27th.

The news has caused investors to reevaluate their high valuations of major AI players and question the massive AI investments made by Magnificent Seven hyperscalers like Meta (META) and Google (GOOG). The market impact reached beyond tech companies, affecting utility companies serving AI data centers like Constellation Energy (CEG), which was down 18%, and caused investors to seek safe haven in U.S. Treasuries. SA Quant has pre-empted potential market volatility with recent recommendations on defensive positioning, check out Feeling Bearish? Stock Up On These 5 Defensive Positions

The market selloff reflects growing concern that if AI development becomes more efficient, with fewer chips needed, it could lead to slower growth in data center expansion. Concerns around reduced demand for power systems, cooling equipment, construction services, and related components negatively impacted stocks in the Alpha Picks portfolio, including Modine Manufacturing Company (MOD), Powell Industries Inc. (POWL), and Celestica Inc. (CLS).

However, it is important to note that the impacted companies are generally more diversified across products and services and not purely focused on AI infrastructure. Additionally, it is likely that even if individual AI models become more efficient, the global shift toward AI integration and the growing need for edge computing suggests fundamental demand for physical infrastructure will persist.

In other news, Twilio (TWLO) climbed another 3.4% on Monday, adding to its massive 15% gain last Friday, on investor confidence in its updated operating model.

"Momentum in core products and key verticals, self-serve, cross-sell, and with ISVs and partners, all drive greater conviction in durable double-digit growth," said Mizuho analysts, led by Siti Panigrahi, in an investor note. "We view the guidance as favorable to deliver beat and raise quarters, with upside potential coming from improving macro trends, increasing cross-sell, and AI products."

Salesforce, Inc. (CRM) and Green Brick Partners, Inc. (GRBK) also posted gains in excess of 3% on Monday.

Concluding Summary

The market experienced significant turbulence following the announcement of DeepSeek’s competitive AI capabilities, seeing off concerns around the sustained demand for AI-adjacent sectors. However, the long-term outlook remains more nuanced as global AI integration and edge computing needs will likely continue to drive demand for data centers and other physical infrastructure. If you are concerned about current market volatility, take stock of SA Quant’s recent defensive recommendations.

Written by Steven Cress

VP of Quantitative Strategy at Seeking Alpha