Japanese technology shares fell on Tuesday as a global market rout sparked by the emergence of a low-cost Chinese artificial intelligence model entered day two, with investors questioning the sky-high valuation and dominance of AI bellwethers.
It all stemmed from a free AI assistant launched by Chinese startup DeepSeek last week that the firm said uses less data at a fraction of the cost of services available currently, garnering significant attention worldwide including from OpenAI CEO Sam Altman who called it an "impressive model".
"We will obviously deliver much better models and also it's legit invigorating to have a new competitor!," Altman, the head of the AI firm behind ChatGPT, said in a social media post.
The launch and increasing popularity of DeepSeek spurred investors to dump tech stocks globally, with ripples felt from Tokyo to Amsterdam to Silicon Valley.
In Japan, chip-testing equipment maker Advantest (6857.T), a supplier to Nvidia (NVDA.O), lost 10% on Tuesday after diving nearly 9% on Monday. Chip-making equipment maker Tokyo Electron (8035.T) fell 5.3%, while technology start-up investor SoftBank Group (9984.T) was 6% lower.
Over in the U.S., Broadcom (AVGO.O) finished down 17.4%, followed by ChatGPT backer Microsoft (MSFT.O) which fell 2.1% and then Google parent Alphabet (GOOGL.O) which ended down 4.2%.
The Philadelphia semiconductor index (.SOX) tumbled 9.2%, for its deepest percentage drop since March 2020. Tech heavy South Korean and Taiwan markets are closed for Lunar New Year.
The selloff has brought into the spotlight the crowded positioning among investors as well as the extremely high valuation of some of these firms.
"What makes Monday's tech selloff so jarring is that the valuations of many of these AI and tech companies offer no margin of error," said David Bahnsen, chief investment officer at The Bahnsen Group.
"The excessive weighting these tech stocks have in many investor portfolios and the high concentration these tech stocks have in the market indices was a significant and under-appreciated risk issue."
The hype around AI has powered a huge flow of capital into equities in the last 18 months, inflating valuations and lifting stock markets to record highs.
It is not just the chipmakers and tech companies but companies focused on datacentres also taking a hit, with Malaysia's utility conglomerate YTL Power (YTLP.KL) down 7.5% on Tuesday, its third session of steep loss.
Jun Rong Yeap, market strategist at IG, said there may be some "sell first, think later" thinking at play, with opinions divided on whether DeepSeek will eventually be the so-called game-changer that reshapes the U.S. AI landscape.
"But if anything, market participants dislike uncertainties and are clearly unwilling to take the risks in the near term."
Little is known about the Hangzhou startup behind DeepSeek, whose controlling shareholder is Liang Wenfeng, co-founder of quantitative hedge fund High-Flyer, records showed.
Its researchers wrote in a paper last month that DeepSeek-V3 model, launched on Jan. 10, used Nvidia's lower-capability H800 chips for training, at a cost of less than $6 million.
Charu Chanana, chief investment strategist at Saxo, said the development serves as a reminder that competition in the global AI arena is intensifying and Nvidia may not be in pole position forever.
"By developing cutting-edge AI models with less advanced and more cost-efficient hardware, DeepSeek challenges the heavy investments U.S. tech companies are pouring into high-cost AI infrastructure."
Investor focus will now be on the flurry of tech earnings this week, with executives likely keen to calm frayed nerves.
