By Jacky Wong

A Chinese artificial intelligence upstart has sent highflying technology stocks into a tailspin. The rise of China's DeepSeek is disrupting the industry's established order, but some players could actually thrive in the new landscape.

Monday's panic selloff hit the companies supplying the "picks and shovels" for the AI gold rush hardest. Nvidia, whose high-performance chips have been central to the AI boom, saw its stock drop 17% Monday. Taiwan Semiconductor Manufacturing, or TSMC, which produces Nvidia's chips, wasn't spared either -- its American depositary receipts fell 13%.

Investors were spooked by DeepSeek's claim that it could build AI models rivaling OpenAI and a competitor from Alphabet at a fraction of the cost. They fear that, if DeepSeek delivers on its promise, the need for expensive chips could plummet, dragging down the whole supply chain.

While DeepSeek has indeed made some breakthroughs -- mostly driven by the constraints in its access to the most advanced chips -- there are reasons to believe that demand for the high-end chips may continue. For one, cutting-edge AI models will still rely on the fastest, most capable chips available.

Microsoft CEO Satya Nadella highlighted the phenomenon known as Jevons Paradox: When a resource becomes more efficient to use, overall consumption often increases rather than decreases. Cheaper AI could unlock applications in industries and devices previously priced out of the AI revolution, driving greater demand for semiconductors across the board.

The fact that Apple's stock rose 3% during Monday's rout is telling. If AI models become efficient enough to deliver compelling functionality on smartphones, this could expand AI adoption while boosting demand for consumer devices.

The selloff in names like TSMC, therefore, may represent an opportunity. Yes, TSMC manufactures the high-end chips powering today's most advanced AI models, which could face pressure if demand shifts. But, as the world's largest contract chip maker, it is well-positioned to benefit from broader growth in electronic devices and semiconductors as AI becomes more accessible.

At around 21 times forward earnings, TSMC trades at a reasonable multiple compared with Nvidia's still-lofty 40 times. For a company poised to win whether AI remains high-end or goes mainstream, the current valuation looks attractive.

In times of market panic, it is worth remembering that the real winners often only emerge once the fog lifts.

Write to Jacky Wong at jacky.wong@wsj.com

(END) Dow Jones Newswires

January 28, 2025 07:51 ET (12:51 GMT)

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