AI Market Turmoil: Will DeepSeek Disrupt U.S. Giants?

This week began with a significant sell-off in the U.S. technology sector, particularly among the top players in artificial intelligence (AI). The cause: a claim from Chinese startup DeepSeek that its open-source large language model R1 nearly matches the capabilities of leading U.S. rivals such as OpenAI’s GPT-4, Meta’s Llama, and Google’s Gemini, but at a much lower cost.

Investors are uneasy as DeepSeek’s advanced, cost-effective AI model poses a potential threat to U.S. leadership in AI. While it is uncertain whether Chinese AI developers can surpass U.S. companies, a shift in investor interest within the AI sector appears imminent.

An equally efficient and affordable AI platform could enable U.S. tech giants to create scalable applications more economically. This would allow them to allocate resources towards innovative AI-driven software and services. Furthermore, competition from DeepSeek will likely prompt U.S. AI infrastructure providers—like chip manufacturers, data centers, and energy companies—to pursue lower-cost, high-quality solutions.

With the upcoming fourth-quarter 2024 earnings reports approaching, the insights provided by tech giants engaged in extensive AI applications will be vital. Key stocks to watch include: Meta Platforms Inc. META, Alphabet Inc. GOOGL, Amazon.com Inc. AMZN, Palantir Technologies Inc. PLTR, and Twilio Inc. TWLO.

Key AI Stocks to Monitor Before Earnings Releases

The earnings outcomes and management insights from these leading AI tech companies will be crucial for investors in light of the Wall Street volatility triggered by DeepSeek.

Below is a chart showcasing the price performance of these five stocks over the past year.

Image Source: Zacks Investment Research

Meta Platforms Inc.

META’s AI platform is improving ad delivery and boosting advertisers’ return on investment. Strong performance in sectors like e-commerce, gaming, and media is advantageous for Meta. The company announced plans to invest between $38-$40 billion in AI initiatives for 2024, with projections of spending exceeding $50 billion in 2025.

On July 24, 2024, META revealed its Llama 3 AI model, supported by NVIDIA’s latest HDX H200 chip. The platform promises significant revenue generation, allowing an investment of $1 from an API provider to potentially yield $7 over four years. This mostly free Llama 3 model aims to compete with established players like OpenAI.

NVIDIA’s next-gen AI chip, Blackwell, will further enhance META’s capabilities. Generative AI has already contributed to METAs advertising revenue, which increased by 18.6% year over year to $39.89 billion, accounting for nearly all third-quarter revenues. Meta will announce its earnings results on January 29, following market close. The estimated revenue and earnings growth rates for this year stand at 14.6% and 11.1%, respectively, with a Zacks Consensus Estimate showing a 2.2% increase in earnings expectations over the past week. META holds a Zacks Rank #3 (Hold).

Alphabet Inc.

Alphabet continues to thrive, thanks to strong growth in its cloud services and search operations. Google Cloud is benefiting from rapid advances in AI infrastructure, enterprise AI solutions, and core Google offerings. GOOGL’s extensive AI portfolio is attracting new clients and enhancing existing customer relationships.

Alphabet’s expanding capabilities in generative AI may serve as a catalyst for future growth, while its leadership in the search engine market remains a key advantage. Updates to search algorithms and the removal of harmful ads are positively influencing traffic on GOOGL’s platform.

Currently, GOOGL is capitalizing on strong demand for Large Language Models with its state-of-the-art AI model, Gemini. Google Bard and Search Generative Experience, powered by Gemini Pro, aim to enhance user experience. Google Cloud has also introduced Duet AI, which assists developers across software lifecycles.

Alphabet plans to report earnings on February 4, after the market closes. The company anticipates revenue and earnings growth rates of 12.1% and 11.4%, respectively, for the current year, with a slight increase in earnings expectations over the last month. GOOGL currently holds a Zacks Rank #3.

Amazon.com Inc.

Amazon is experiencing growth from its Prime and AWS services, with projections for 2024 net sales to increase by 10.7% compared to 2023. Improvements in the AWS offerings and rising usage rates have positively impacted performance. Additionally, AMZN’s fast delivery services and expanded content portfolio are driving sales.

A deepening relationship with third-party sellers and a robust advertising business continue to contribute to growth. Expanding operations in grocery, pharmacy, and healthcare, along with a focus on generative AI, are other positive factors.

Amazon is set to announce its earnings results on February 6, after market close. The expected growth rates for revenue and earnings are 10.8% and 20.1%, respectively. The Zacks Consensus Estimate for current-year earnings has improved by 0.3% recently, and AMZN currently holds a Zacks Rank #2 (Buy).

Palantir Technologies Inc.

Palantir builds software platforms primarily for the intelligence community, supporting counterterrorism efforts both domestically and internationally. Recently, the company has seen growth in its commercial sector alongside traditional government contracts, attributed to a strategic push into AI.

In 2023, Palantir launched its Artificial Intelligence Platform (AIP), enabling customers to quickly analyze data to help achieve their business objectives. AIP allows for unified access to various large language models, facilitating more effective data handling.