The launch of Chinese AI start-up DeepSeek sent shockwaves through the AI sector recently. Stocks like Nvidia plunged double digits on the news as the new competitor threatened to upend the AI ecosystem.
DeepSeek, an open-source model, outlined how its engineering allowed it to achieve similar results to models like OpenAI's ChatGPT, but at a much lower cost. In fact, the company said it spent just $5.5 million to train its chatbot, though OpenAI accused it of "distillation," meaning that it used OpenAI's model to train its own, without permission.
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In the two weeks since the sell-off, the panic around DeepSeek seems to have settled, but the stocks that plunged on the news have not fully recovered. As of Feb. 7, Nvidia is still 10% lower than where it closed on Jan. 24, representing more than $300 billion in value lost.
There's still a lot of uncertainty as to how DeepSeek will impact the AI sector over the long term, but it seems unlikely to derail the massive ramp-up in spending on AI infrastructure after big tech companies like Microsoft, Meta Platforms, Alphabet, and Amazon all announced plans to significantly increase their capital expenditures to build cloud infrastructure and AI capabilities.
There was another comment from Arm Holdings (NASDAQ: ARM) CEO Rene Haas about DeepSeek that should give investors confidence as well.
Haas said that DeepSeek is good for the AI industry and for Arm because it drives efficiency. Commenting on the recent capital expenditure forecasts, he also acknowledged, "No one is pulling back. And the reason for that is we're nowhere near the capabilities that could be transformational in terms of what AI can do."
Referring to DeepSeek, he added, "So, I'm actually -- I think it's a great thing and a good thing, and I think it will actually increase overall compute demand. And for Arm, even better because it allows us to play in areas where efficiency is key, and that's our sweet spot."
Image source: Getty Images.
Why Arm can capitalize on the opportunity
Arm designs and licenses its CPU and other semiconductor architecture, and the company's historical strength is that its architecture works well for conserving battery power. It's more efficient than the alternative, the x86 from Intel and Advanced Micro Devices.
As CFO Jason Child noted in an interview with the Motley Fool, Arm is the only company whose chips are found everywhere from the cloud to virtually any edge device, and the company is uniquely positioned to capitalize on both the investment from cloud hyperscalers into AI and the disruption from DeepSeek.
Technology like DeepSeek should accelerate the development of technologies like Edge AI, or programs like Apple Intelligence where computing happens on your device rather than in the data center. That benefits Arm since its chips dominate edge devices like smartphones, especially devices with a battery as its chips are prized for their low power consumption.
Arm has forged relationships with a number of cloud infrastructure companies, so it should benefit from increasing capex from those companies. For example, its CPU licenses are in Amazon Web Services' Graviton, Microsoft Cobalt, and Google Axion, and its Grace CPU is in a range of Nvidia Superchips.
Arm's market share in cloud computing has improved from 9% in 2022 to 15% in 2024, so it's gaining and still has a large opportunity to capture further share as it seems to be doing with those partnerships above.
It's still early for AI
Technology companies are going to keep investing in AI at least until we've reached artificial general intelligence (AGI) and artificial superintelligence (ASI), and CFO Child argued that getting there is going to be compute-intensive. The DeepSeek development doesn't change that trajectory.
DeepSeek could spawn a separate set of less-expensive, low-power applications like Edge AI, but the goal remains a more powerful AI that will have myriad applications in robotics, automation, and beyond.
With its strong market share at the edge and close partnerships with the cloud hyperscalers, Arm looks uniquely well-positioned to win no matter what direction AI goes in. For investors looking for an AI stock buy in the DeepSeek era, Arm looks like a great choice.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jeremy Bowman has positions in Advanced Micro Devices, Amazon, Arm Holdings, Meta Platforms, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Intel, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft, short February 2025 $27 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
