Is DeepSeek a threat to your ASX tech stocks? Here's what you need to know

Chinese artificial intelligence company DeepSeek single-handedly wiped over US$1 trillion off the US stock market after the company claimed it had developed a rival AI assistant app, at a fraction of the cost.

The news sent some of the largest US tech companies sharply lower, led by Nvidia (-16.9%), Alphabet (-4.0%) and Microsoft (-2.1%).

In a Nutshell

• What is DeepSeek? DeepSeek is a Chinese AI company, founded in 2023 by Liang Wenfeng, the co-founder of the hedge fund High-Flyer.
• What has DeepSeek achieved? DeepSeek recently launched DeepSeek V3, a large language model (LLM) that the company claims can match or even outperform the models produced by AI giants like OpenAI and Anthropic. But unlike its competitors, DeepSeek V3 is open-source, meaning anyone can inspect, use or modify it.
• What's the big deal? DeepSeek has achieved this at a fraction of the cost. Its reasoning models require just US$5.5 million in training costs, achieved via innovative training techniques whereas OpenAI's GPT-4o costs over US$100 million and requires some of the latest and most expensive Nvidia GPUs.
• What does this matter? The remarkable efficiency of DeepSeek is challenging conventional wisdom in the AI industry. While tech giants like OpenAI, Alphabet, and Microsoft invest billions in AI development, DeepSeek is achieving comparable results despite limited access to high-end hardware due to US trade restrictions. This raises questions about whether the massive spending by these technology leaders is truly necessary or if there might be more cost-effective paths to AI advancement.
• Nvidia leads the selloff. Nvidia shed approximately US$500 billion in market cap, the largest single-day market cap loss in history. As a leading supplier of AI GPUs, investors are concerned that a more cost-effective model will lower demand.

Are Tech Stocks in Trouble?

The S&P/ASX 200 Information Tech Index dipped 2.8% in early trade on Monday, mirroring the Nasdaq's 3.0% decline. Stocks leading to the downside around market open include NextDC (-8.8%), Megaport (-7.1%) and Wisetech Global (-2.6%).

Despite the sea of red, Citi analysts expect the DeepSeek developments to have a limited impact on near-term contracts and demand for data centre names like NextDC (ASX: NXT). This outlook is supported by recent major spending commitments from tech giants. Meta CEO Mark Zuckerberg announced last Friday plans to boost capital expenditure by 54-66% to US$60-65 billion this year, while Microsoft is set to spend US$80 billion for AI-capable data centre development in 2025.

"While we do expect cheaper models/lower compute costs to accelerate AI adoption, we do acknowledge potential risks to long-term data centre capacity and see the potential for NextDC to trade weaker today," the analysts said.

NextDC shares fell 7.1% at Monday's open, reaching their session low with a 9.4% decline around 10:20 am AEDT, before recovering to trade down 6.0%.

The weakness aligns with the poor performance of international data centre peers, with Digital Reality dropping 8.7%, China's GDS falling 6.8%, and Equinix declining 4.3% in the overnight session. Equinix demonstrated the most volatile action, as it tumbled as much as 8.8% in early trade before recovering some ground.

Despite the broad-based weakness, RBC Capital Markets analyst Garry Sherriff says there could be an opportunity to "selectively add to ASX technology names, particularly high quality, market leaders who trade at high multiples who may be more attractively priced.

Reducing the cost of using large language models (training, reasoning, and inferencing) is a significant advantage for software companies, as it translates to more affordable AI capabilities, according to Garry. With lower-cost APIs, software vendors can offer their generative AI solutions at more competitive prices, which could help boost adoption and scale.

Citi analysts shared the same view, expecting lower costs for AI models and services as a positive for software company margins.

The ASX 200 Tech Index is showing resilience, already bouncing almost 200 basis points from session lows. After the initial 2.9% dip, the Index is now down a more modest 1.0% as of 11:25 am AEDT.