U.S. technology stocks experienced a sharp decline after a small Chinese AI startup announced its ability to compete with major players like ChatGPT and other American AI platforms at a significantly lower cost.

DeepSeek, established in Hangzhou in 2023, quickly climbed to the top of Apple’s App Store for free apps after launching a new open-source AI model that it claims is comparable to OpenAI’s o1 model. Its website even faced outages due to the surge in interest.

On Monday, tech stocks, including those from Nvidia, a leading AI chip manufacturer, suffered losses.

“Tech stocks are clearly facing substantial pressure, primarily driven by Nvidia’s decline as the market sees DeepSeek as a significant risk to the U.S. technology sector’s leadership in the AI Revolution,” noted Wedbush Securities analyst Daniel Ives.

What is DeepSeek?

DeepSeek operates as an artificial intelligence lab. The startup asserts that its AI models, DeepSeek-V3 and DeepSeek-R1, rival the most sophisticated models from OpenAI and Meta.

Chinese corporate registration indicates that Liang Wenfeng, a co-founder of the hedge fund High-Flyer, is the primary shareholder.

Why is DeepSeek causing a stir in the tech industry?

DeepSeek claims that its DeepSeek-V3 model was trained at a cost of under $6 million. In contrast, OpenAI reportedly spent over $100 million to train the latest iteration of ChatGPT, as mentioned in Wired.

Analysts find the technology remarkable, especially since DeepSeek asserts it utilized less advanced chips for its AI training.

The previous administration under President Joe Biden imposed restrictions on the export of specific high-end AI chips.

“In inappropriate hands, powerful AI systems could heighten significant national security threats, potentially facilitating the creation of weapons of mass destruction, bolstering offensive cyber operations, and contributing to human rights violations such as mass surveillance,” stated the Biden administration earlier this month.

Nevertheless, DeepSeek claims that these chip restrictions have not hindered its ability to deliver a model that is 20 to 50 times cheaper than OpenAI’s o1 model, based on the task at hand.

“We anticipated an explosive advancement in AI following ChatGPT’s public release, but it seems the U.S. was taken aback by this significant progress emerging from China,” remarked Damian Rollison, the director of market insights for AI marketing firm SOCi, in a statement to YSL News.

Some critics have questioned the accuracy of the startup’s claims. Scale AI CEO Alexandr Wang stated in a CNBC interview last week that the startup utilized advanced Nvidia chips. Bernstein analysts also noted in a report that the total costs of training were higher than what DeepSeek asserts.

DeepSeek has not provided a response to YSL News regarding these claims.

How has the stock market responded to DeepSeek?

On Monday morning, tech stocks saw a decline. Chipmaker Nvidia’s shares plummeted by as much as 18%, erasing approximately $560 billion from the company’s market valuation, marking the largest loss in market history according to Bloomberg.

The S&P 500 index fell by 1.9%, while the Dow Jones Industrial Average rose by 0.3%. Meanwhile, the technology-focused Nasdaq composite dropped by 3.4% in the early afternoon on Monday.

Is the DeepSeek app available for free?

The DeepSeek app utilizes the DeepSeek-V3 model. The startup describes its application as employing “cutting-edge” AI that “sets global benchmarks and rivals top international models.”

The app soared to the top of the Apple App Store’s list of “top free apps” shortly after its launch on January 10.

Are there security issues to consider?

DeepSeek is the latest Chinese-related app to climb the Apple App Store charts, following the ascent of TikTok rival RedNote earlier this month.

Concerns regarding security are expected to be heightened with DeepSeek, more so than with TikTok or RedNote, according to SOCi’s Rollison.

“It is probable that the ongoing AI arms race will lead to geopolitical ramifications that extend beyond mere economic rivalry, influencing the future trajectory of these transformative technologies,” Rollison asserted.

DeepSeek targeted by a cyberattack

On Monday, DeepSeek’s website indicated that registration may be difficult “due to extensive malicious attacks” on their services, advising new users to attempt registration later. Existing users can still log in without any issues, according to the company.

Contributing: Reuters