DeepSeek’s Cost-Effective AI Development Sparks Market Recalibration, Affecting Data Centre Stocks

The rise of Chinese AI firm DeepSeek has sent ripples through the AI ecosystem, with analysts cautioning that companies, including those in Singapore, could face significant repercussions. DeepSeek’s ability to develop AI systems at a fraction of the cost and with lower power consumption has caused a notable dip in US tech stocks, including Nvidia, which lost nearly US$600 billion in market value on January 27 – the largest single-stock loss in Wall Street history.

The effects of DeepSeek’s emergence were also felt in Singapore’s data centre-related real estate investment trusts (Reits), with several seeing losses on the same day. Keppel DC Reit dropped approximately 8 per cent to S$2.09, while Digicore Reit fell 6 per cent to US$0.545. Mapletree Industrial Trust saw a 2.7 per cent decline to S$2.14, and CapitaLand Ascendas Reit dropped 0.8 per cent to S$2.56. However, by the close of trading on Tuesday, the Reits had regained some ground, with Keppel DC rising 2.87 per cent and CapitaLand Ascendas Reit jumping 1.95 per cent.

DeepSeek, which has soared in popularity on the Apple Store’s download charts, has been lauded for its ability to deliver AI performance comparable to OpenAI and Meta’s offerings, all while being more cost-efficient and using less power. This breakthrough has led analysts to recalibrate their market outlook and earnings expectations for the entire AI sector.

RHB analyst Vijay Natarajan explained, “The advancement of DeepSeek seems to have triggered a recalibration of market outlook, which has affected earnings expectations across the AI ecosystem. This, coupled with a recent rally in the sector, makes AI-related beneficiaries vulnerable to profit-taking and short-term corrections.”

The news has raised concerns within Singapore’s data centre Reits, including Keppel DC Reit, Digital Core Reit, and Mapletree Industrial Trust, as the potential for AI capabilities to be achieved with more affordable hardware solutions could dampen the demand outlook for high-quality data centres.

Morningstar equity analyst Xavier Lee added that if DeepSeek’s claims are accurate, with lower costs for AI development, investment in AI could diminish, leading to greater competition in the space. This, in turn, could affect the profitability of companies investing heavily in AI infrastructure.

“Some companies may question whether the returns justify the capital expenditure, potentially leading to a reduction in investment, similar to how Apple and Dyson stopped pursuing electric vehicle projects when the market proved too competitive,” Lee noted.

While the market is reacting to these developments, Natarajan from RHB believes that the current correction may be slightly overdone. He emphasised that it remains early days for DeepSeek’s innovation, and its long-term implications are still unclear.

Meanwhile, stocks of AI supply chain-related companies in other global markets, such as Japan’s chip sector and data centre Reits, also saw declines. Shares of ASML, a Dutch semiconductor giant, dropped by 7 per cent, and US-listed shares of Taiwan Semiconductor Manufacturing Company plunged by 13 per cent.

Despite short-term volatility, Morningstar’s Phelix Lee remains optimistic about AI investments in the long run, suggesting that DeepSeek’s efficiency gains could lead to more widespread adoption and ultimately sustainable growth in the sector.