What is DeepSeek, and why is it causing Nvidia and other stocks to slump?

A Chinese artificial intelligence company called DeepSeek is grabbing America's attention — and sending a shock wave through Wall Street — due to its new tech, which some experts say rivals that of OpenAI's ChatGPT. 

DeepSeek is also catching investors off guard because of the low development costs for its AI app, which Wedbush Securities analyst Dan Ives pegged at only $6 million. By comparison, OpenAI, Google and other major U.S. companies are on track to invest a total of roughly $1 trillion in AI over the coming years, according to Goldman Sachs.

On Monday, DeepSeek's rollout roiled shares of AI stalwarts such as Nvidia, the high-flying manufacturer of advanced chips engineered for AI development, and Dutch company ASML, another chipmaker. The Chinese company's tech is raising questions about whether demand for Nvidia's chips could take a hit, as well as whether investors are overvaluing tech stocks that have been buoyed by the promise of AI, from Meta to Microsoft, experts said.

"DeepSeek has taken the market by storm by doing more with less," said Giuseppe Sette, president at AI market research firm Reflexivity, in an email. "This shows that with AI the surprises will keep on coming in the next few years."

DeepSeek's latest app comes just days after Mr. Trump announced a new $500 billion venture with ChatGPT maker OpenAI, Softbank and Oracle, dubbed Stargate, which he touted as ensuring "the future of technology" in the U.S.

Tech stocks have soared on Wall Street's expectations for AI profits

AI-related stocks took a hit on Monday, with Nvidia shares tumbling 17% as of 2:08 p.m. Eastern Time while ASML shed 7.6%. Broadcom, another semiconductor stock, slumped 18%.

Some energy-related stocks also plunged on Monday on investor worries that the new tech could require less energy to run, translating into lower demand from the tech sector. GE Vernova, which makes wind and gas turbines, plunged 23%, while electricity generator Vistra slumped 30%.

The tech-heavy Nasdaq index slumped 3.5%, or 698 points, in afternoon trade, while the S&P 500 declined 1.7%. The blue-chip Dow Jones Industrial Average added 0.4%.

Despite the sharp drop on the Nasdaq, it's far from the worst day for the index during the past five years. The worst one-day decline since Jan. 27, 2020, came on March 16, 2020, when the index plunged more than 12% as COVID-19 pandemic hit the economy. 

As Chinese AI application DeepSeek attracts hordes of American users, Trump administration officials, lawmakers and cybersecurity experts are expressing concern that the technology could pose a threat to U.S. national security.

DeepSeek's introduction in the U.S. on Monday saw it quickly become the most downloaded free application in the country on Apple's app store. The rollout also rocked Wall Street as investors struggled to compute the sudden appearance of a low-cost, open-source generative AI tool able to compete with leading artificial intelligence apps such as OpenAI's ChatGPT. 

Shares of Nvidia, the U.S. manufacturer of advanced chips engineered for AI development, plummeted 17%, chopping roughly $600 billion off its market value — a record single-day drop for a U.S. stock. 

That explosive debut was branded a "wake-up call" by President Trump on Monday. Addressing reporters on Tuesday, White House Press Secretary Karoline Leavitt said the National Security Council would examine the potential national security implications around DeepSeek's launch, noting that the administration would seek to "ensure American AI dominance." 

"The U.S. cannot allow Chinese Communist Party models such as DeepSeek to risk our national security and leverage our technology to advance their AI ambitions," Rep. John Moolenaar, a Missouri Republican who chairs the bipartisan House Select Committee on the Chinese Communist Party, said Tuesday in a statement shared on social media. "We must work to swiftly place stronger export controls on technologies critical to DeepSeek's AI infrastructure."

The spotlight on DeepSeek comes amid rising tensions over trade, geopolitics and other issues between the two superpowers. The U.S. has already imposed significant export controls on China in an effort to rein in Beijing's production of semiconductors used in developing advanced AI, with the most recent curbs coming in December. 

Security threat for users

While the calls from Moolenaar could be the first inkling of a possible congressional crackdown, Ross Burley — a co-founder of the nonprofit Centre for Information Resilience — warned that DeepSeek's emergence in the U.S. raises data security and privacy issues for users. Chinese law grants Beijing broad authority to access data from companies based in China. 

"More and more people will use it, and that will open the door to more and more personal data just being given away to the [Chinese Communist Party] and being sent basically to mainland China to be able to inform them of their activities," Burley told CBS News.

"What they'll use it for is behavior change campaigns, disinformation campaigns, for really targeted messaging as to what Western audiences like, what they do," he added.

DeepSeek, which is based in the Chinese city of Hangzhou, notes in its privacy policy that the personal information it collects from users is held "on secure servers located in the People's Republic of China." 

Under that policy, the company says it collects information including users' "device model, operating system, keystroke patterns or rhythms, IP address, and system language." DeepSeek also collects "service-related, diagnostic, and performance information, including crash reports and performance logs," according to the company. 

A key difference from TikTok

The fact that DeepSeek's servers are based in mainland China differentiates it from TikTok, the Chinese-owned social media platform that Congress had sought to ban on national security grounds before President Trump signed an executive order last week directing the Justice Department to not enforce the law for a period of 75 days.

In an effort to mitigate U.S. regulatory concerns, TikTok's parent company, ByteDance, in 2022 moved all of its U.S. data to infrastructure owned by American software maker Oracle. 

The legislation banning TikTok — the "Protecting Americans from Foreign Adversary Controlled Applications Act," which President Biden signed into law last April — grants the federal government broad scope to crack down on tech platforms owned by countries regarded as U.S. adversaries. 

Under that law, Congress can compel a platform to divest its U.S. operations from foreign ownership, and it can be shut down if it qualifies as a threat. The law can apply to any platform that allows users to share content; has more than 1 million monthly active users; is owned by a company located in a foreign adversary-controlled country; and has been determined by the president to present a significant national security threat.

But DeepSeek may be seen as less of a threat given that, unlike TikTok, it is an open-source large language model, according to Matt Sheehan, a China fellow at the Carnegie Endowment for International Peace. 

"[A] lot of these open-source apps, open-source models, you can actually sort of use them directly on other platforms. Perplexity is a major U.S. AI company, and they're currently using a version of DeepSeek that you can use that doesn't have the data privacy or security threats," he told CBS News. 

Advancing censorship?

One issue that DeepSeek users face outside of China: censorship. For example, a CBS News analysis of the application found that DeepSeek did not return any results for a prompt seeking information bout the 1989 Tiananmen Square protests and subsequent massacre in Beijing.

Burley of the Centre for Information Resilience thinks such suppression of information on an app being downloaded by millions of users will pressure policymakers to act. 

"I think it's incumbent on Western governments — the U.K., Canada, the U.S. — to look and see if it is wise for the Apple store and the Android store to host this large language model when it is so clearly being curated to push Chinese narratives and censorship," he said. 

What is DeepSeek?

DeepSeek is a private Chinese company founded in July 2023 by Liang Wenfeng, a graduate of Zhejiang University, one of China's top universities, who funded the startup via his hedge fund, according to the MIT Technology Review. Liang has about $8 billion in assets, Ives wrote in a Jan. 27 research note.

Liang, who had previously focused on applying AI to investing, had bought a "stockpile of Nvidia A100 chips," a type of tech that is now banned from export to China. Those chips became the basis of DeepSeek, the MIT publication reported.

Ben Reitzes, head of technology research at Melius, told investors in a note that DeepSeek makes legitimate breakthroughs as an AI tool, including better learning and more efficient use of memory, although he expressed skepticism about the "amount of chips used."

Is DeepSeek available in the U.S.?

The company's AI app is available in Apple's App store, as well as online at its website. The service is free and as of Monday morning was the top download on Apple's store, although some people were having trouble signing up for the app. 

On its Chinese site, DeepSeek blamed "large-scale malicious attacks" on its service, requiring it to temporarily limit new registrations. "Existing users can log in as usual," the company said in the post, which was dated shortly after midnight Jan. 28 in China's local time.

The company released its latest AI model on Jan. 20, which is causing Wall Street to reappraise the AI sector. 

"Last week DeepSeek launched a model that rivals OpenAI's ChatGPT and Meta's Llama 3.1 and was #1 on Apple's App Store over the weekend," Wedbush's Ives wrote. "DeepSeek built the model using reduced capability chips from Nvidia. which is impressive and thus has caused major agita for U.S. tech stocks with massive pressure on Nasdaq this morning."

How is DeepSeek different than other AI apps? 

DeepSeek is an open-source large language model that relies on what is known as "inference-time computing," which Sette said in layman's terms means "they activate only the most relevant portions of their model for each query, and that saves money and computation power." 

Some experts praised DeepSeek's performance, with noted tech investor Marc Andreessen writing on X on Jan. 24, "DeepSeek R1 is one of the most amazing and impressive breakthroughs I've ever seen — and as open source, a profound gift to the world."

However, Ives said he's skeptical the service will gain ground with major U.S. businesses. 

"No U.S. Global 2000 is going to use a Chinese startup DeepSeek to launch their AI infrastructure and use cases," Ives wrote. "At the end of the day there is only one chip company in the world launching autonomous, robotics, and broader AI use cases and that is Nvidia."

What does DeepSeek mean for Nvidia and other tech companies?

Wall Street is trying to assess the long-term impact of a low-cost AI tool from China that rivals ChatGPT and other so-called generative AI apps. It also raises questions about whether Silicon Valley is overspending on tech advancements in the AI sector, noted Angelo Zino, senior equity analyst at CFRA Research, in an email. 

"The fact that this technology is supposed to take less energy and is more cost-effective than U.S.-based models has U.S. technology investors very concerned," Jay Woods, chief global strategist at Freedom Capital Markets, said.

It's also unclear what type of pushback or reaction could come from the White House, given that Mr. Trump has raised the possibility of placing new tariffs on Chinese imports, although he also gave the Chinese-owned TikTok a reprieve by ordering the Justice Department not to enforce a looming ban.

In the meantime, major tech companies including Meta and Microsoft are slated to report earnings this week, where investors will likely hear more from their executives about their AI plans and their thoughts on DeepSeek, experts said. 

Some Wall Street analysts think Monday's stock selloff is an overreaction, noting that the enormous demand for AI will continue lifting key players in the sector. 

"It's one thing to train a [large language] model for less money, but accommodating the huge demand for the consumption of all this AI technology is still going to require massive amounts of infrastructure," Adam Crisafulli of VitalKnowledge said in a report.

What is Nvidia saying about DeepSeek? 

In a statement to CBS News, Nvidia offered praise for DeepSeek. 

"DeepSeek is an excellent AI advancement and a perfect example of test-time scaling," the company said in an email. "DeepSeek's work illustrates how new models can be created using that technique, leveraging widely available models and compute that is fully export-control compliant."

But, Nvidia added, AI inference, or using AI models to make decisions or predictions, "requires significant numbers of NVIDIA GPUs and high-performance networking. We now have three scaling laws: pre-training and post-training, which continue, and new test-time scaling."