European semiconductor shares with artificial intelligence exposure—including ASML Holding ASML, ASM International ASMXF, BE Semiconductor BESVF, and Arm Holdings ARM—dropped in the 7%-10% range following news about Chinese company DeepSeek’s AI models. Questions have been raised about the true cost of AI model training and inference. We are maintaining our fair value estimates for these firms, as this development could have mixed effects, but our base case still assumes healthy AI demand in the long term.
Until now, the main market hypothesis for the AI supply chain tied increased spending to better AI model performance. Tech firms like Microsoft MSFT, Alphabet GOOGL/GOOG, Amazon AMZN, and Meta Platforms META have collectively invested hundreds of billions to purchase GPUs from Nvidia NVDA to satisfy the insatiable demand for AI applications.
DeepSeek is a challenge to this hypothesis, as its V3 model rivals GPT-4o and Llama 3.1 across most benchmarks, and it was reportedly trained on a $5.5 million budget, significantly lower than competitors. However, that number only includes the cost of GPU training and excludes other overheads, making comparisons difficult and raising questions about the truthfulness of DeepSeek’s claims.
If a bearish scenario materializes and hyperscalers cut their capital expenditures, this would flow upstream in the semiconductor supply chain, lowering near-term growth rates around the industry and impacting European semiconductor equipment makers and Arm. The duration of any potential deceleration in growth would also be uncertain.
However, this news could be bullish in the longer term, as higher computing efficiency would lead to lower unit costs and barriers to entry, resulting in broader AI adoption. On Jan. 24, Mark Zuckerberg said Meta plans to spend $60 billion-$65 billion on AI in 2025. Since the DeepSeek news has been public since Dec. 26 and its models are accessible to everyone, we would be surprised if the company had not considered these developments.
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