Last month, a new artificial intelligence (AI) model garnered attention in the markets for its efficiency and cost-effectiveness. The Chinese company DeepSeek announced that its AI chatbot demonstrated similar performance to ChatGPT and was developed for less than $6 million. This revelation prompted questions about whether tech giants are spending efficiently on AI development.
One company that could potentially be affected is Alphabet, which owns Google and has been working on its own chatbot, Gemini. Despite the disruption caused by DeepSeek in the markets, a senior Google executive, Demis Hassabis, CEO of Google DeepMind, appeared unconcerned about the newcomer. Hassabis acknowledged that the DeepSeek model is impressive; however, he emphasized that it does not have groundbreaking capabilities, stating, “Despite the hype, there’s no actual new scientific advance.” He attempted to place the launch of DeepSeek in context for the tech sector.
The significant aspect was not that DeepSeek’s model surpassed ChatGPT or Gemini but that a relatively obscure Chinese enterprise, with fewer than 200 employees, managed to develop an AI model at a fraction of the cost of tech giants. This development suggests that other tech companies, without substantial AI investments, are not necessarily at a disadvantage, as they could potentially build on DeepSeek’s open-source model.
Regarding Alphabet investors, DeepSeek’s model does not significantly threaten Gemini and other chatbots; it faces bans in multiple countries due to privacy concerns, limiting its widespread use. The primary concern for Alphabet investors should be whether the $75 billion planned for capital expenditures this year, largely aimed at AI development, represents a prudent investment, given the previous year’s $52.5 billion in capital purchases.
An enhanced Gemini chatbot alone may not suffice to satisfy Alphabet investors. Crucial to Alphabet’s prospects is how effectively the company transforms its investments into substantial growth drivers, possibly through improved AI functionalities in YouTube or Google Search that can be monetized.
Though DeepSeek may not represent a significant concern for Google, its swift market entry with a competitive product has drawn attention and increased scrutiny on AI-related expenditures. This scrutiny may lead investors to demand tangible results from these investments sooner rather than later.
As for investing in Alphabet’s stock, the company remains a prominent player in the tech industry, potentially benefiting significantly from AI advancements. However, the path to realizing these benefits could be tumultuous for investors. In response to investor concerns over substantial AI spending, tech companies may need to curb expenses and reduce staff.
During periods of strong investor enthusiasm and bullish sentiment on AI, spending is easier to justify. Nevertheless, with heightened concerns about investment returns and competition, companies like Alphabet may find it challenging to convince investors of the prudence of their AI expenditure.
Risk-averse investors might prefer to adopt a cautious approach and postpone investing for the time being. Given the recent popularity of AI stocks, a market correction could be imminent. While Alphabet remains a solid long-term investment opportunity, trading at a price-to-earnings ratio of 23, short-term volatility is expected.
