What Happened?
Shares of online advertising giant Alphabet (NASDAQ:GOOGL) fell 4.6% in the morning 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.
The shares closed the day at $191.80, down 4.2% from previous close.
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What The Market Is Telling Us
Alphabet’s shares are very volatile and have had 25 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 biggest move we wrote about over the last year was 3 months ago when the stock gained 7% on the news that the company reported third-quarter earnings that exceeded analysts' revenue, operating income, and EPS expectations. The segments themselves were also all solid, with Search, YouTube, and Cloud all exceeding revenue estimates.
Leading the pack was the cloud segment, which grew 35% year on year. Up next was YouTube, with combined ad and subscription revenue over the past four quarters surpassing $50 billion. To top it off, the company continued to demonstrate new ways to innovate in the Search business, its primary cash cow. First, AI Overviews (like generative AI for Google Search) are being rolled out in 100 countries, reaching more than 1 billion users monthly. Second, Circle to Search, which makes it as easy as pinching your screen to search for an image or video, is also available on over 150 million Android devices.
Lastly, the company continued to make significant progress in other bets that can expand its addressable market and create new monetizable opportunities. Weekly, Waymo reached 1 million fully autonomous miles and serves over 150,000 paid rides, the first among autonomous vehicle companies. These updates are closely watched and anticipated by analysts, as they often earmark significant progress toward the mass adoption and monetization of autonomous vehicles.
Moving to the bottom line, operating profit at the segments also beat. Interestingly, GOOGL noted that 25% of new code generated at the company is powered by AI, indicating the potential efficiency that can be delivered internally and to customers. Zooming out, we think this was an impressive quarter.
Alphabet is up 1.2% since the beginning of the year, and at $191.76 per share, it is trading close to its 52-week high of $200.21 from January 2025. Investors who bought $1,000 worth of Alphabet’s shares 5 years ago would now be looking at an investment worth $2,679.
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