In recent times, the balance in the AI industry has swayed with the emergence of a new Chinese startup, DeepSeekThis company has boldly declared that it has developed a model approaching the effectiveness of ChatGPT but at a fraction of the cost—merely $5.6 millionThis claim has sent shockwaves through the U.S. stock market, particularly impacting technology stocks deeply intertwined with AI growthFor investors who have long trusted the profitability of major tech companies, the rise of DeepSeek raises pressing concerns about the underlying technological capabilities of American firms and whether their massive investments in AI are yielding meaningful returns.

Amidst these developments, some analysts are suggesting that the U.S. tech market, particularly in the case of large corporations, may be on the verge of a crisis reminiscent of the burst of the dot-com bubble in the early 2000sThis theory is linked to a concept known as the “Minsky moment.” Named after economist Hyman Minsky, this term describes a pivotal point in the economy where prolonged prosperity leads to excessive borrowing and speculation, creating an unstable financial backdropOnce triggered by factors like rising interest rates or declining asset prices, this moment can herald a swift collapse in market confidence, plummeting asset values, and a surge in debt defaults.

Investors are wary of a repeat of the early 2000s, where the Nasdaq Composite index saw a steady decline post the infamous Black Friday, with some analysts estimating recovery might take over a decadeGiven the stakes, investors are understandably keen to steer clear of prolonged downturns, which could prove financially devastating.

Nvidia, a titan in the AI space, has been in the spotlight as wellDeepSeek's ability to achieve comparable or superior results with significantly reduced computational power has raised questions about whether the market still requires Nvidia's powerFor context, Nvidia boasts a staggering market capitalization of around $3 trillion, exceeding that of 25 Intel companies, 12 AMDs, and even surpassing the collective market capitalization of 40 major companies listed on the Frankfurt Stock Exchange.

Between October 2022 and now, Nvidia's stock price has surged nearly twelve-fold in about 1,000 days, showcasing a remarkable growth trajectory

Advertisements

This soaring valuation is not merely a result of industry excitement or Nvidia’s inherent capabilities, but it also reflects a significant influx of wealth into the U.S. stock marketIn nations with open financial systems, investing in U.S. stocks is simplified, drawing attention to popular tech companies like NvidiaThis accessibility, however, can sometimes lead to blind and disproportionate enthusiasm among investors.

DeepSeek's efficiency in computational power echoes the phenomenon of increased engine thermal efficiency in automobiles—while cars may become more fuel-efficient, the lower cost of driving may encourage more frequent travel, thus ultimately increasing overall resource consumptionThis is known as Jevons Paradox, where technological progress results in reduced resource intensity but unexpectedly heightens total consumptionThis dynamic isn’t unique to automotive technology; similar patterns can be observed in household appliances, internet bandwidth, and computing resourcesTherefore, to suggest that advancements in DeepSeek's efficiency diminish the necessity of high computational power is fundamentally flawed.

Before DeepSeek's arrival, it was standard practice for AI companies to optimize algorithms and enhance computational efficiencyNvidia led the charge, achieving at least a thousand-fold increase in performance per unit of computational power over the last decade for AI inferenceIf improvements in computational efficiency were detrimental to Nvidia, its growth would not have thrived in such a manner, nor would its stock performance have been so impressive.

Interestingly, even though Nvidia appears to be primarily a hardware firm, its competitive edge lies significantly in its software, particularly the CUDA architectureThis environment allows developers to utilize familiar programming languages to delegate tasks to GPUs, paired with ready-to-use libraries that significantly cut development time and costsFurthermore, Nvidia's robust compatibility between hardware and software ensures that users face minimal barriers when considering hardware switches, thus creating a formidable ecosystem where detachment from Nvidia is challenging.

The DGX servers and supercomputing clusters produced by Nvidia have become standard equipment for AI development, widely adopted by leading institutions such as OpenAI, Google, and DeepMind

Advertisements

This extensive infrastructure extends back to 2006, establishing multiple barriers within technology, ecology, and consumer habitsIn comparison, AMD's ROCm launched only in 2015, lacking a compelling positioning to compete directly with established firms.

Despite some areas where AMD chips might match or even undercut Nvidia prices, they are not considered the go-to choice for leading AI firmsRecently, rumors have circulated regarding DeepSeek's potential to bypass Nvidia's CUDA framework, igniting market debates that have subsequently shifted some attention away from Nvidia toward other undervalued AI tech companiesStocks of several chip tech firms on the Hong Kong and A-shares markets have surged as many companies have announced their intentions to work with DeepSeek, aiming to ride the wake of its momentum.

The AI sector is still in its infancy, making it inevitable that rival products similar to DeepSeek will continue to emergeFrom a cost-effectiveness and product promotion viewpoint, there are serious questions surrounding the feasibility of independently evolving alternatives to CUDA in the short term, akin to a scenario where one grows wheat to produce flour for the purpose of making bread—an endeavor that might be more costly and misaligned with customer preferencesHowever, scaling up these operations to encapsulate large market shares could, in the long run, pose a threat to major incumbents, provided they receive adequate policy support and manage initial high-cost investments effectively, reminiscent of the rapid development witnessed in China’s electric vehicle sector.

In the early stages, policy skirmishes often create win-lose situations, with Nvidia's stock being significantly influenced by the U.S. government’s sanctions against Chinese chipsThese sanctions not only impair Nvidia's hardware and software shipping volumes but also prompt developers in sanctioned countries to seek alternatives, thereby eroding Nvidia's competitive moat and user loyalty, resulting in unfavorable projections

Advertisements

Nevertheless, despite tumultuous trade relations, Nvidia's shipping volumes have remained relatively stableEven under intense trade disputes, products subject to sanctions might still find their way through alternative channels.

If these conflicts escalate and China continues to divest itself of Nvidia's AI-centric infrastructure, a new technology arms race could ensueHigher domestic demand for computing power within U.S.-based tech giants could, paradoxically, strengthen Nvidia’s drive to innovate, suggesting that long-term consequences from sanctions may not bring about cataclysmic damage to either side.

As to whether the internet bubble is poised for a resurgence, many experts view the issue through the lens of inflated stock prices and market caps leading to inevitable downturnsHowever, AI encompasses distinct characteristics that differentiate it from the pastThe industry is still in its developmental stages, with greater potential for breakthroughs than the internet revolution ever hadDuring the dot-com era, various new players, some lacking viable revenue streams or clear-cut business models, spurred a frenzy on the Nasdaq simply for having “.com” in their titles.

Conversely, the contemporary landscape is dominated by heavily financed companies with proven profitability, while startups need more than lofty narratives to secure fundingIn the ‘90s, the Federal Reserve's loose monetary policies led to low interest rates and ample liquidity, fueling the internet bubbleToday, however, the climate of high-interest rates creates elevated financing costs, imposing stricter barriers to entry and facilitating a pronounced headwind effect, which calls into question the liquidity conditions necessary for a re-emergence of an internet-style bubble.

As the costs of capital remain high, AI enterprises are forced towards more rational growth strategies, which helps avoid reckless spendingAdditionally, challenges related to employment, legal ethics, and governmental regulation imbue the AI industry with uncertainties, compelling investors to exercise prudence

While the human tendency towards bullishness must be acknowledged, qualitative evaluations of 2025 AI technologies need to be markedly different from those applied in 2000.

Investors must focus on three critical areas: first, examining whether technological advancements can transform consumer sectors sustainably; second, assessing whether companies possess enduring capabilities for generating revenue, thus avoiding the risk posed by non-profitable newcomers; and third, keeping abreast of shifts in the broader economic landscapeObserving behaviors around interest rate fluctuations is essential, as the resulting capital flow could offer substantial opportunities but also hide potential perils beneath the surface.

In conclusion, the positions of giants like Nvidia remain robust for long-term investment, even as entrants like DeepSeek stir the watersThese innovations foster competition and enhance the industry environmentRisks, however, are dynamically tethered to uncertainties surrounding U.S. government sanctions against Chinese chip investments, though this threat seems to be primarily short-termFurthermore, developments in Federal Reserve monetary policy, along with the emergence of new players who may draw unnecessary acclaim but fail to deliver profits, merit continual observationThe shockwaves created by DeepSeek serve as a harbinger of market change, suggesting that similar events will arise as the sector evolvesInvestors must navigate this shifting terrain with a clear-eyed view of sustained fundamentals, avoiding over-leveraged positions and remaining vigilant regarding inherent risks within the stock market landscape.