What Happened?
Shares of tech giant Microsoft (NASDAQ:MSFT) fell 7.1% in the pre-market session as stocks heavily tied to the AI market took a hit after Chinese artificial intelligence startup DeepSeek released a new large language model (DeepSeek-R1) that ranks competitively on key global benchmarks (coding competitions, math evaluations), uses less advanced semiconductor chips, costs significantly less to build (at $5.5 million - excluding non-compute costs), and has already achieved strong adoption after topping the iPhone App Store for AI apps.
Notably, the company has also open-sourced this model, a move that may make it harder for rivals to justify huge upfront expenditures on hardware, software, and expertise to develop similar systems. Speaking at the World Economic Forum in Davos, Switzerland, Microsoft CEO Satya Nadella praised DeepSeek's efforts, calling the new model "super impressive" for its open-source design, efficient inference-time computing, and high compute efficiency. "We should take the developments out of China very, very seriously," he added.
Nadella's comments suggest that upstarts like DeepSeek could reshape the competitive landscape of AI. DeepSeek's announcement disrupts long-held assumptions in key ways: 1) It undercuts the narrative that bigger budgets and access to top-tier chips are the only ways forward for AI development. 2) By using less advanced hardware, DeepSeek opens the door for innovators who face high chip costs or export restrictions, reaffirming they can still compete. 3.) The model's success questions the growth narrative of chipmakers like Nvidia—whose soaring valuations depend on the demand for cutting-edge, high-performance hardware.
Overall, DeepSeek's model demonstrates that AI innovation is no longer a race fueled solely by how much you spend, but rather by how resourceful you can be with what you have.
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What The Market Is Telling Us
Microsoft’s shares are somewhat volatile and have had 12 moves greater than 2.5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 5 days ago when the stock gained 4% after President Trump announced a $500 billion Stargate project (Joint Venture with OpenAI, Oracle and SoftBank) to develop artificial intelligence infrastructure in the United States.
UBS analyst Timothy Arcuri thinks players such as Nvidia would significantly benefit, likely as the supplier of critical semiconductor chips powering some of the anticipated infrastructure requirements, including data centers. As a result, it is not hard to project the anticipated gains from hyperscalers such as Oracle, Microsoft and other cloud platforms.
Overall, the deal should accelerate demand for builders and innovators within the AI space.
Also buoying the tech sector was Netflix. The company reported strong Q4 earnings results. Specifically, global streaming paid membership exceeded Wall Street expectations, with a strong net add figure (18.9 million vs. estimates of 9.8 million). This led to a revenue and EPS beat in the quarter. Additionally, revenue guidance for 2025 beat expectations, and the company spoke optimistically about multiple vectors such as ad revenue, live events, and new content. Overall, the results were impressive.
Microsoft is up 2.6% since the beginning of the year, and at $429.27 per share, it is trading close to its 52-week high of $467.56 from July 2024. Investors who bought $1,000 worth of Microsoft’s shares 5 years ago would now be looking at an investment worth $2,646.
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