Technology Hardware Stocks: DeepSeek R1 Model Doesn’t Alter Our Valuations or Forecasts

Many technology hardware stocks under our coverage plunged during Monday trading after reports of Chinese company DeepSeek’s generative artificial intelligence model R1 offering performance parity with US models at a much lower training cost. The iShares Semiconductor ETF SOXX was down 8% in midday trading.

Why it matters: In our view, the market selloff implies fears of weaker future generative AI infrastructure investment resulting from cheaper models. We are less pessimistic and expect strong generative AI investment to continue.

• We’ve expected generative AI models to become slimmer and more efficient, and for US builders to develop more efficient models. But overall, hardware spending will continue to rise, particularly with a serious competitive alternative out of China.
• In the longer term, we foresee a commoditization of AI models that shouldn’t diminish investment in hardware infrastructure. Lower-cost models should accelerate the path to financial returns for model builders, but they will continue to invest heavily in hardware to support them.

The bottom line: We maintain our fair value estimates and moat ratings for our technology hardware coverage, including Apple AAPL, Broadcom AVGO, Marvell Technology MRVL, Arista Networks ANET, and Micron Technology MU. The DeepSeek news and market selloff don’t alter our long-term forecasts.

• We don’t expect a cut to infrastructure investment in the short term and believe US and European model builders will continue to invest heavily in developing larger and higher-performing models. Demand still exceeds chip supply, and we don’t expect that to change due to this news.
• We believe the selloff largely reflects more uncertainty being priced into AI-exposed stocks, which we believe to be reasonable. We believe AI investment will continue to rise rapidly, but that more bullish forecasts might have underestimated efficiency gains in new models.