Technology earnings and the impact of DeepSeek

Many of the mega-cap US technology stocks that have been leading the equity-market rally have seen their valuations tumble this year after Chinese group DeepSeek unveiled its own artificial intelligence (AI) large-language model (LLM). It is claimed that the AI Assistant is as powerful as those developed in the West, but it was developed at a fraction of the cost.

The news has cast a long shadow over the current fourth-quarter earnings season. It called into question the US technology sector’s ability to deliver the scale of profits warranted by the lofty investment that the technology giants are making in the sector. There are not only questions over the scale of future profits, but what timescales these will take to materialise. Many of the biggest players in the sector have now issued their fourth-quarter results, with all the statements being issued after the DeepSeek news. How has the development impacted the earnings season so far?

A cloudy outlook for mega-cap companies?

Alphabet, Amazon, Meta Platforms and Microsoft are heavily investing in their cloud computing businesses, as they see it as vital future infrastructure. Both Alphabet and Microsoft saw about $200bn wiped from their market valuations following their fourth-quarter results, as they issued guidance on infrastructure spending this year that was higher than many in the market expected. Cloud revenue growth also generally slowed from the third quarter, but this sequential slowdown was blamed on capacity constraints – there simply wasn’t enough capacity to meet demand. Amazon’s valuation lost about $90bn in the wake of its fourth quarter numbers, as it missed expectations in its cloud business and continued to spend big on AI.

Microsoft plans to spend $80bn on data centres this year. The investment will be used to build and expand AI-enabled data centres that will train AI models and deploy AI and cloud-based applications. Alphabet plans to spend a cool $75bn. Meta Platforms, meanwhile, announced it would spend $65bn this year on AI development, while the recently announced Stargate project – backed by Oracle, OpenAI, and Japanese tech investor Softbank – has plans to spend $500bn on AI infrastructure over several years. There was no hint of a slowdown which cast doubt on DeepSeek’s achievements. Amazon said it plans to boost capital expenditures to $100 billion in 2025, largely driven by AI investments. The company reported $83 billion in capital expenditures last year.

Both Microsoft and OpenAI said they were probing whether a group linked to DeepSeek had accessed OpenAI's data without authorisation, reports suggested. A Financial Times source at OpenAI also reportedly said that the company had evidence of data theft by the Chinese group.

Meta Platform’s Mark Zuckerberg - chief executive of one of the first AI-exposed mega-caps to report earnings and face the scrutiny of journalists and analysts – appeared to sum up industry thinking. He dismissed the notion that the company’s overall AI spending will now fall as he believes the investment will be “a strategic advantage over time”. In Silicon Valley, big bucks really matter when you are attempting to control the infrastructure of tomorrow. After all this is not only about financial riches. It is also about power.

Nvidia comments keenly awaited

DeepSeek’s ability to produce efficient low-cost LLMs hurt AI-microchip producer Nvidia. Its market value fell by nearly $600bn on 27 January, the largest one-day wipeout of any company in US stock market history.

Nvidia is last in line of the AI mega-caps to reveal its earnings and issue its forward guidance. It does not post its fourth-quarter 2024 results until 26 February. However, investors in the world’s largest chip group by market value are likely to have been reassured by the bullish statements from Mr Zuckerberg and his deep-pocketed peers as they relayed their 2025 spending plans.

Jensen Huang, Nvidia’s chief executive, has probably been reassured by cloud-company statements that the orders – and dollars – will keep rolling in. Of course, if effective models can be built using much less computing power, that could potentially be bad news for Nvidia.

Unanswered questions for investors

However, despite the confidence of the titans of Silicon Valley, there are many unanswered questions for investors at this stage. We do not know exactly what these billions of dollars will be invested in. What hardware? What infrastructure? We have no idea of return on investment – or the timescale over which these returns will be generated. This means investors need a lot of faith – something which is not usually
grist to the mill for the world’s most experienced investors. Their currency is facts and data, not faith. Volatility looks set to continue for quite some time.