On January 20,2025,the AI company DeepSeek,a subsidiary of Huanfang Quantitative,unveiled its latest model,DeepSeek-R1.This model has been compared in performance to OpenAI's cutting-edge GPT-4o,yet its training cost stands at merely a fraction—approximately one-thirtieth—of what it takes to train GPT-4o.This revelation unleashed a storm of speculation on Wall Street,where the value of major tech stocks had previously been buoyed by high expectations.Investors are now left questioning whether these high valuations hold true merit.
The crux of the matter lies in the notion that Chinese AI models,such as DeepSeek's,do not rely on substantial computational power to achieve impressive results.Instead,their effectiveness is attributed to the iterative updates and enhancements of their underlying algorithms.This raises critical concerns about whether the extensive investments in AI infrastructure by tech giants are justified,especially in a landscape where high-performance models can emerge from cost-effective methodologies.
Since the launch of DeepSeek-R1,the ramifications on the tech sector have been palpable.Nvidia,known for its dominance in AI chip supplies,witnessed a staggering fall of 13.84% in market capitalization,indicative of rising skepticism towards tech stocks that had previously been riding high on expectations of AI-driven growth.Concurrently,TSMC,a company capable of mass-producing advanced chips,experienced a decline of 3.52%,and ASML,a supplier of lithography machines integral to chip manufacturing,saw a dip of 3.29%.
On February 4,both Google and AMD released their fourth-quarter financial results for the period ending December 2024,with growth figures that would typically be deemed strong.Nevertheless,investors appeared unphased.In the aftermath of their announcements,Google's Class C fell by 7.27%,while Class A shares dropped by 7.57%.AMD’s stock faced even steeper losses,plummeting by 8.84%,signaling potential turbulence for these highly valued stocks.
AMD reported record earnings with a 24.16% year-on-year growth to reach $7.658 billion in the fourth quarter of 2024.Its data center division posted a remarkable 69.11% growth,bringing in $3.859 billion,while revenue from client services grew by 58.32% to $2.313 billion.However,a decline in gaming and embedded product revenue by 58.85% and 12.68%,respectively,darkened the company’s outlook.
Despite the spotlight on these declines,AMD managed to enhance its adjusted gross margin by 3.27 percentage points year-on-year to 54.06%.This improvement stemmed primarily from the higher margins within its data center business and an increase in client business profit margins as well.Moreover,AMD's adjusted net profit surged by 42.27% to $1.777 billion during this same period,translating to an adjusted earnings per share of $1.09,marking a 41.56% increase from the previous year.
Over the entirety of 2024,AMD achieved a year-on-year revenue growth of 13.69%,amounting to $25.785 billion.Adjusted net profit also grew by 25.99% to reach $5.420 billion,buoying earnings per share to $3.31—up by 24.91% compared to the previous year.The company's performance in the fourth quarter exceeded market expectations in terms of revenue and earnings per share,yet it was the below-expected performance in the data center sector that raised alarm among investors.
In the fourth quarter,AMD's data center revenue reached $3.859 billion,falling short of the $4.14 billion that analysts had anticipated.Despite a total annual growth of a staggering 94% within this division,totaling $12.6 billion,
the company’s CEO,Dr.Lisa Su,discussed the pivotal contribution of around $5 billion in revenue generative from AI-related Instinct GPUs during the earnings call.
Looking forward,Dr.Su expressed optimism for 2025,predicting an overall increase in demand across all business lines,especially for data center and client operations,alongside steady growth in gaming and embedded sectors.Her confidence stems from a belief in the potential for substantial double-digit revenue and earnings growth in the coming years,based on recent AI infrastructure investments and advancements in models put forth by DeepSeek.
As part of their future strategy,AMD plans to accelerate investments in software,emphasizing contributions to the open-source community in a bid to foster competitive capabilities in the software domain,aligning themselves with industry peers.
In a contrasting narrative,Google’s fourth-quarter results reflected mixed sentiments.The tech giant recorded revenues of $96.469 billion,marking an 11.77% increase year-on-year,albeit slightly below market forecasts of $96.56 billion.Google's advertising revenue experienced a commendable 10.60% growth,reaching $72.461 billion.However,cloud revenue,with a 30.06% rise to $11.955 billion,also underperformed against the anticipated $12.19 billion.
Net profit for the quarter surged by 28.27% to $26.536 billion,yielding diluted earnings of $2.15 per share,surpassing market expectations of $2.13.Operational profitability also climbed significantly by 30.70% year-on-year,totaling $30.972 billion,resulting in an operating margin of 32.11%—an increase of 4.65 percentage points year-on-year but a minor quarterly decline.
Notably,Google Cloud reported an operating profit margin of 17.51% for the fourth quarter,showing a year-on-year increase but a less pronounced improvement quarter-on-quarter,raising questions about when or if the scale benefits of Google Cloud would reach saturation.
During the earnings call,CEO Sundar Pichai showcased his enthusiasm for future growth opportunities and indicated an acceleration in the capital investment strategy for 2025.He outlined a projected capital expenditure of $75 billion.The expenditure for the first three quarters of 2024 already reached $38.3 billion,with expectations for the fourth quarter to hit $14.276 billion—bringing the total capital expenditure for the year to around $52.576 billion,reflecting a 43% increase over the previous year.
A significant portion of this capital expenditure is earmarked for AI-related infrastructure,particularly focusing on servers and data centers.The forecast for the first quarter of 2025 alone ranges between $16-$18 billion,exceeding the anticipated $14.3 billion by analysts.
Given the revelations surrounding DeepSeek's capabilities and the associated diminishing cost of computational power,there is a growing concern among investors regarding Google’s substantial capital spending and whether it is justified.This uncertainty could partly explain the dip in share prices following their latest earnings announcement.
In conclusion,while Wall Street is gradually stabilizing,the challenges instigated by DeepSeek’s disruptive technologies linger.The titans of the tech industry are poised to present their insights and expectations regarding the trajectory of AI during their earnings reports due in December 2024.The substantial advancements in algorithms and efficiency prompted by models like DeepSeek are subtly reshaping the investment landscape,consequently affecting the valuations of major tech stocks.Thus,Google's and AMD's recent adjustments might merely scratch the surface,as upcoming earnings releases from other tech sector players will likely expose these trends within their own stock performances.