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Investing Considerations: AI, Deep Seek, and Creative Destruction
by Kevin Kroskey, CFP®, MBA
Capitalism is a dynamic economic system where competition drives innovation and efficiency. However, it also has a ruthless side: the process of creative destruction, a term popularized by economist Joseph Schumpeter. This concept describes how innovation continuously disrupts industries, topples market leaders, and replaces them with more efficient or technologically superior competitors. These changes of course have implications for investors.
The recent emergence of DeepSeek, an artificial intelligence (AI) model from China, may prove to be a perfect case study. This powerful, free AI has shaken investment markets and raised questions about the future dominance of OpenAI’s ChatGPT and the economic ripple effects, particularly on companies like Nvidia.
The DeepSeek Disruption
DeepSeek’s open-source AI models have reportedly outperformed OpenAI’s GPT- 4-turbo on some key benchmarks, particularly in math and coding. More significantly, DeepSeek is free, making it an attractive alternative for businesses and developers looking to reduce costs. The emergence of DeepSeek has triggered immediate reactions from investors, as it could signal a shift in AI market leadership, a position that OpenAI has enjoyed since the release of ChatGPT.
The implications of this disruption extend beyond OpenAI. DeepSeek’s impact is being felt across the AI and semiconductor industries, where companies like Nvidia have been among the biggest winners of the AI boom. The question now is: Could Nvidia, a dominant player in the AI hardware space, also face the consequences of creative destruction?
Nvidia?
Nvidia has been one of the biggest beneficiaries of the AI revolution. Its high-performance chips have become essential for training large AI models like OpenAI’s ChatGPT. The explosion in demand for AI-powered applications has fueled Nvidia’s stock price, making it one of the most valuable technology companies in the world.
However, DeepSeek’s rise poses a potential long-term risk to Nvidia’s AI-driven demand. DeepSeek’s ability to achieve high-level AI performance on significantly less expensive hardware raises questions about whether the AI industry will remain as reliant on Nvidia’s chips as before. If AI developers find ways to train and deploy powerful models without needing massive quantities of Nvidia’s high-end GPUs, the demand for these chips could decline, negatively impacting Nvidia’s stock price.
Investors have been laser-focused on Nvidia’s dominance in AI hardware, and any signal of reduced demand could cause significant market volatility not only in Nvidia stock but throughout today’s highly concentrated and arguably expensive U.S. stock market fueled by the AI boom.
Leaders Then Laggards
This phenomenon is not new. History is filled with examples of once-dominant companies being dethroned due to technological advancements.
IBM was once the leader in personal computing but lost its dominance to Microsoft and Apple as the PC industry evolved.
Blockbuster was the king of video rentals until Netflix’s streaming model disrupted the market.
Nokia and BlackBerry led the mobile phone industry before Apple’s iPhone revolutionized the smartphone market.
Nvidia, while currently on top, is not immune to this cycle of creative destruction.
The rapid ascent of DeepSeek underscores an important lesson in capitalism: no company is invincible. Market leaders can quickly fall behind if they fail to anticipate disruptive innovations. The AI industry is evolving at breakneck speed. While Nvidia is currently the dominant player, its long-term success is not guaranteed.
DeepSeek’s impact on AI markets is just beginning, but it has already sent shockwaves through the industry. Whether Nvidia can adapt to these changes or finds itself in a fight for survival remains to be seen. But if history is any guide, creative destruction will continue to shape the future, making today’s giants tomorrow’s cautionary tales.
Investing Implications
These examples serve as a crucial reminder that market hype can be fleeting, and today’s best-performing stocks may not be the safest long-term bets. If news, like DeepSeek’s recent announcement impacts markets and news, is not predictable, logic forces the conclusion that markets are not predictable. In the face of uncertainty, a prudent investor diversifies while a gambler chases the fad du jour.
Rather than predicting, focus on preparing through proper diversification, which is more complex than simply having a bunch of holdings. Diversification done right involves owning assets or strategies that have unique sources of positive expected returns. When combined in your portfolio strategy benefits that result may include reduced downside risk, lower volatility, higher dollar growth over time, and improved resilience to varying markets and economic conditions throughout time.
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Kevin Kroskey, CFP®, MBA is the Founder of True Wealth Design, providing “Accounting, Tax & Wealth Solutions To Help You Plan Smarter and Live Better.” This article is for educational purposes only. The strategies referenced apply to Accredited Investors or Qualified Purchases per SEC regulations. To explore how these strategies may apply to you, call or email kkroskey@truewealthdesign.com.
Opinions and claims expressed above are those of the author and do not necessarily reflect those of ScripType Publishing.