A wave of selling in the artificial intelligence sector sparked by China’s DeepSeek language model has sent shares of chip technology specialist Arm Holdings (ARM) down sharply.
The Chinese AI startup spooked investors last week with its dazzling AI model R1, a complex reasoning model that is a match for OpenAI’s newest o1 and saw DeepSeek shoot to the top of the Apple app store.
DeepSeek only emerged on the scene very recently, launching a free, open-source large-language model in December.
Amazingly, it claimed it was developed in just two months at a cost of under $6 million, a fraction of the cost of similar models, raising concerns about the level of investment being made by tech firms in the U.S., which has been driving shares of semiconductor companies such as ARM.
DeepSeek used fewer and less advanced chips than OpenAI or Google (GOOGL) does. Apparently, it used a cluster of 2,000 Nvidia chips to train its V3 model, versus the tens of thousands of chips usually used for training models of similar size.
“Deepseek R1 is one of the most amazing and impressive breakthroughs I’ve ever seen,” Silicon Valley venture capitalist Marc Andreessen said in a post on X.
Its R1 model is ranked fourth on the Chatbot Arena leaderboard, behind versions of Google’s Gemini and ChatGPT. Chatbot Arena, which is hosted by researchers at University of California, Berkeley, says its performance “on par” with OpenAI-o1.
ARM Stock Falls on Worry
Shares of ARM, which is working with Nvidia (NVDA) on the latest round of AI architecture, fell 7% in pre-market trade on Monday.
NVDA, the main beneficiary of the AI spending which once tried to buy ARM, tumbled 8% as investors reassessed some of the monster investments being made by U.S. tech giants into AI. Several Japanese semiconductor stocks fell sharply overnight.
Meta Platforms (META) last week announced it would spend $60 billion investing in AI this year, while Microsoft (MSFT) intends to spend $80 billion.
But DeepSeek’s success signals that the level of spending by U.S. companies, and their dominance of the space, should not be taken for granted.
“It’s super impressive how effectively they’ve built a compute-efficient, open-source model. Developments like DeepSeek’s should be taken very seriously,” commented Microsoft CEO Satya Nadella.
Is ARM a Good Stock to Buy?
Overall, Wall Street has a Moderate Buy consensus rating on ARM stock, based on 14 Buys, four Sells and one Sell. The average ARM price target of $157.20 implies about 3% downside.
