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Chip Stocks Mixed Amid DeepSeek Shock, Earnings in Focus

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Semiconductor stocks experienced a mixed performance on Wednesday, with European chip stocks surging due to strong earnings, while U.S. stocks, including Nvidia, faced continued pressure as investors weighed the potential impact of China’s low-cost DeepSeek AI tool.

The Philadelphia semiconductor index struggled to find direction, down 0.4% by mid-day, and the broader S&P 500 tech index fell 1.9%, primarily due to a significant drop in Nvidia’s shares, which were down more than 6%. Nvidia had seen an 8.9% increase on Tuesday after suffering a 17% drop on Monday, marking a record one-day loss in market value. The decline came after DeepSeek, a Chinese startup, unveiled its free AI assistant, which quickly overtook OpenAI’s ChatGPT in downloads on Apple’s App Store, signaling that China may be catching up in the AI race.

Investors are still trying to assess the implications of DeepSeek’s emergence and its ability to challenge established players in the AI market. Jack Ablin, CIO at Cresset Capital, pointed out that the market is in a “middle ground,” with some investors taking DeepSeek seriously and others brushing it off as a temporary disturbance. He added that investors are struggling to determine whether the news is fundamentally negative for high-priced stocks like Nvidia, or if the AI industry will continue its upward trajectory despite the challenge.

The U.S. Federal Reserve’s ongoing policy meeting and earnings results from major tech companies are also in focus. Quarterly results from Microsoft and Meta, set to be released later Wednesday, will be scrutinized for insights into their AI investment plans.

Jefferies Chief Economist Mohit Kumar noted that while chipmakers and energy sectors may continue facing pressure, other sectors could rebound from Monday’s sell-off and gain momentum. However, the current high valuations of certain tech companies will require strong earnings results to justify their prices.

Despite the buzz around DeepSeek, some experts remain skeptical of the startup’s long-term success, especially due to the lack of information about its spending budget. Additionally, OpenAI and Microsoft are investigating whether DeepSeek improperly used data from ChatGPT in its technology.

In Europe, tech stocks saw a strong rally, boosted by ASML’s nearly 5.6% gain following its report of unexpectedly strong bookings. The European tech index finished up 2.4%, with BE Semiconductor and ASM International also seeing significant gains.

In contrast, U.S. semiconductor stocks were mixed. While Nvidia, Cirrus Logic, ARM Holdings, and Broadcom all saw losses, Coherent Corp and Advanced Micro Devices posted gains, rising by 3.6% and 2.6%, respectively. ASML’s U.S. shares also saw a strong 4.4% increase.

 

Microsoft Adds DeepSeek’s AI Model to Azure, Expands AI Offerings

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Microsoft announced on Wednesday that it has made DeepSeek’s R1 artificial intelligence model available on its Azure cloud platform and GitHub, expanding its AI offerings. The model will be added to the model catalog, joining over 1,800 other AI models offered by Microsoft, and will be accessible to developers using these platforms.

This move comes just days after DeepSeek launched a free AI assistant that promises to use significantly less data and cost much less than existing services, leading to a surge in downloads. By Monday, the assistant had overtaken OpenAI’s ChatGPT in downloads on Apple’s App Store, causing concern among tech investors.

Microsoft’s adoption of DeepSeek’s R1 model is part of the company’s effort to reduce its reliance on OpenAI, which developed ChatGPT. Microsoft is seeking to integrate both internal and third-party AI models into its flagship Microsoft 365 Copilot product. Additionally, Microsoft plans to offer customers the ability to run the R1 model locally on Copilot+ PCs, which may help address privacy and data-sharing concerns.

DeepSeek’s decision to store user data on servers in China could pose a challenge for its broader adoption in the U.S., where data security is a key concern. Microsoft and OpenAI are also investigating whether a group linked to DeepSeek unlawfully obtained data from OpenAI’s technology.

In response to DeepSeek’s rise in the AI space, OpenAI’s CEO Sam Altman announced adjustments to their releases, including a new version of ChatGPT tailored for U.S. government agencies. Meanwhile, Chinese tech giant Alibaba also unveiled a new AI model, Qwen 2.5, marking the start of a busy period in the AI market.

 

DeepSeek’s Chatbot Scores Low in NewsGuard Audit, Trails Western Rivals

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DeepSeek, a Chinese AI startup, saw its chatbot underperform in a recent NewsGuard audit, achieving just 17% accuracy in delivering accurate news and information. The audit compared DeepSeek’s chatbot with Western AI models, including OpenAI’s ChatGPT and Google’s Gemini, ranking it tenth out of eleven. DeepSeek’s chatbot was found to repeat false claims 30% of the time and provide vague or unhelpful answers 53% of the time in response to news-related queries, leading to an overall fail rate of 83%. In contrast, Western competitors had an average fail rate of 62%.

This performance raises questions about the quality of DeepSeek’s AI technology, which the company has touted as being on par with or superior to OpenAI’s models, at a fraction of the cost. Despite its low accuracy score, DeepSeek’s chatbot quickly became the most downloaded app on Apple’s App Store, igniting concerns about the United States’ dominance in AI and contributing to a market downturn that resulted in a $1 trillion loss in U.S. tech stocks.

NewsGuard used 300 identical prompts to assess DeepSeek and its Western counterparts, including 30 based on false claims circulating online. The topics of these prompts included incidents like the killing of UnitedHealthcare executive Brian Thompson and the downing of Azerbaijan Airlines flight 8243. DeepSeek’s chatbot also reiterated the Chinese government’s stance on certain issues, even when those topics were unrelated to China, such as in the case of the Azerbaijan Airlines crash.

Despite its poor accuracy, some analysts suggest the significance of DeepSeek’s breakthrough lies in its affordability, with D.A. Davidson’s Gil Luria pointing out that it can answer questions at 1/30th the cost of comparable models. However, as with other AI models, DeepSeek was found to be particularly susceptible to repeating false claims, especially when used to create or spread misinformation.