The emergence of Chinese AI company DeepSeek has rocked markets, with almost $US600 billion wiped off the market cap of US chipmaker Nvidia.
Roger Montgomery, founder and Chief Investment Officer at Montgomery Investment Management, talks to Sean Aylmer about what it means for investors.
This is general information only. You should seek professional advice before making investment decisions.
Welcome to the Fear and Greed Business Interview. I'm Sean Alm. The arrival of a new player in the AI space has sent a major shockwaves through financial markets. Chinese AI company dep Sik has only founded about eighteen months ago, but its new large language model app has been downloaded millions of times in just the last few days and the market response has been swift. On Monday night, Australian time chip maker and Video fell seventeen percent, wiping five hundred and eighty nine billion US dollars. That's not far off a trillion Aussie dollars from its market cap, the biggest one day value wipeout of any company in history. While in all likely n Video will rebound and this interview is being recorded on Tuesday afternoon. The emergence of a Chinese competitor producing an AI model at a fraction of the cost has raised plenty of questions, and not just for Nvidia. As always, this podcast contains general information only and you should seek professional advice before making investment decisions. We speak regularly to Roger Montgomery, founder and chief investment officer at Montgomery Investment Management. October last year, we talked about AI and Roger's own concerns that it was being overhyped, with the real benefits to come in later waves. Roger, welcome back to Fear and Greed.
Great to be with you, Sean, thanks for having me on the program again.
So very quickly, what has Deep Seek done and why are we so worried?
Well, evidently, I might even say apparently, Yeah, they've developed a large language model, an AI powered large language model for six million US dollars that is reportedly superior to chat, GPT and some of the other versions that are out there. That really is quite disruptive. And because valuations were so extreme for these AI related stocks, there's been a bit of a reckoning or a bit of a realignment of expectations.
Okay, so just let's dive into that. It's not so much the actual technology that's been that it's emerged. It's the fact that it's been done so cheaply. Is that what was really hit markets?
Well, how do we even know that the Chinese haven't just copied chatch ept you know? So? So, I mean, more technically savvy people might know that there's a difference or might be able to appraise a distinction between these large language models, But that's not my capability. It is remarkable, I think, and I don't know if anyone's talking about this, but I think that the timing of the announcement has something to do with undermining Donald Trump's stargate five hundred billion dollar investment announcement over the last week or two. And consequently, you know, when you start to think, if you can, if you can build a large language model that's aipowered for six million US dollars, why does anyone need to invest five hundred billion US dollars in the United States. So there's potentially an undermining element to this announcement. And I don't know whether or not that matters to investors. Probably doesn't. What does matter to investors is that the US S and P five hundred and the Nasdaq, the gains in those markets have been very concentrated on the back of this AI theme. And consequently, you know, the US market leadership might change now, and so might the potential returns for investors.
And so take end video. Is the point here that not as many Nvidia chips may be needed in the future if you can have a Chinese startup effectively creating a chat GPT equivalent and using They've used the Nvidia chips, so that's true, but they didn't even use the latest version according to reports. And we keep having all these qualifiers on this, but that the case, Maybe we don't need as many Nvidio chips, Maybe we don't need as many data centers, Maybe we don't need the uranium stocks that sold off yesterday, because maybe we don't need the energy that we thought were going to Is that what we're talking about, then how do we get our head around that as an investor?
Well, that's what everyone's talking about, So you know, there are all the consequences of building too much optimism into share prices. And you might remember, Sean, we were talking about this either last year or the year before. You might remember I gave the example. We did a special I think and I talked about commercial air travel, cars and the television as examples of technology where investors lost out but consumers won. And this could very well be another example of that. Where we've got new technology, consumers are the beneficiaries and shareholders who paid too much and invested too much without knowing who the winner was going to be and how the competitive landscape was going to look in the future, which is always the great difficulty with new technology. They lose out.
Stay with me, Roger, we'll be back in a minute. I'm speaking to Roger Montgomery from Montgomery Investment Management. Okay, So one of the things I think we sort of worked out before the break is that there's not great certainty about exactly what has been developed in China. What does it say about the S and P five hundred magnificent seven, the fact that they are such a big chunk of that market, big chunk of the Misky World Index, the whole priced perfection argument, It looks a little bit frail at the moment.
Yeah. Look, whenever financial market performance and valuations hinge on you on a handful of outperforming stocks, then you know, even even a minor disturbance can lead to the narrative you have something where the narrative changes, it can lead to traumatic consequences. And that's what we're seeing here now. Neither you, nor I nor anyone else knows whether or not this is temporary or a permanent shift. But what I do know that happens time and time again is that you have expectations that are often too optimistic built into share prices of leadership stocks, and particularly when new technology is emerging, and you don't need much to disrupt that narrative. And that's what's happened here. The narrative has been disrupted. And because the S and P five hundred, the Nasdaq, the MISKY are all of the gains over the last few years have largely been driven or a large percentage of those gains have been driven by just a handful of these stocks. When the narrative for the outlook of those companies changes, then so does the returns. Which is why you know, last year I was suggesting that investors look at caps rather than looking at these big cap stocks, and that the gap between the pe ratios of these megacaps and small caps would narrow. Now, what we don't know is whether or not narrow is because the small caps rally, which they have done since we talked about that, and or the pees of the large caps or the megacap starts to come down, which is now happening.
Okay, leaving aside the investment case, here, is this an example of commoditization of an apparent technology breakthrough happening really fast.
Look, I think that's a really good way of describing it. This is not the first technology where this has happened. I mean, we've got to remember that US leadership has been challenged in the past, that it was the Soviets that put the first satellite into space. You know, in the US leadership in military technologies constantly being challenged. So this is the first time. But this development, what it does is that if it's caviate in place, if it's as legitimate as it appears, then it does pose a direct challenge to Invidia because you know, their chips are over forty US thousand dollars each, their GPUs, and they have been assumed to be the backbone of AI training worldwide. Maybe they're not needed, and certainly the new and more expensive chips might not be needed.
So both Nvidia's boss, Jensen Huang and Donald Trump, the US predecedent, have effectively in last twenty four hours come out and said, hey, this is good news. Is it possible that it is good news because it just makes things cheaper by the time it gets to someone like you or I do you know one of the.
Most reliable cell signals that I've ever come across as a professional investor has been a competitor emerged, and I went and spoke to the CEO about the new competitor, and the classic answer from the CEO is on of this is great. This expands the market, This brings more people to the market. This is great. No, No, your company was priced leadership. Your company, the PE ratio put on your stock was assuming that you would remain the leader for infinity, and that is now not the case. So there's a new PE regime that needs to be applied to your stock. And that's what I think we're seeing here. So Trump's comments and the CEO of Nvidia's comments, you know, they are a classic response to saving face. You know, it's an example of saving face when really your leadership is potentially being undermined.
So we can expect some serious volatility in the next week's months, Roger, positive or negative.
I don't know, Sean, you know, but I think if there's any legitimacy to the Chinese claim, and I'm not saying there is, you know, I have a very skeptical hat on whenever I listen to Chinese announcements, and so you know, assuming that it is genuine, then there will have to be a change to the optimism narrative that's been built into the prices of the megacap stocks in the US that rely on the AI story.
Roger, thank you for talking to Fear and Greed.
It's always a pleasure.
Sean as Roger Montgomery, founder and Chief investment Officer at Montgomery Investment Management. This is the Fear and Greed Business Interview. Remember this is general information only, and you should seek professional advice before making investment decisions. Join us every morning for the full episode of Fear and Greed. Daily business news for people who make their own decisions. I'm Sean Elmer. Enjoy your day.