Investing.com -- The breakthrough in AI technology by Chinese startup DeekSeek's r1 model has the potential to benefit the software sector, Citi analysts said.

DeepSeek's "test-time scaling law" achieves AI efficiency at a fraction of the cost compared to OpenAI. This raised questions about the sky-high capital expenditures (capex) across hyperscalers including the recently announced Stargate Investment, and led to a sharp sell-off in global technology stocks.

However, according to Citi, the breakthrough could potentially mark a pivotal moment for AI-enabled software applications.

Citi likens DeepSeek's advancement to the way public cloud technology once democratized access to affordable computing power. The Wall Street firm is particularly optimistic about companies focused on consumption, such as MongoDB (NASDAQ:MDB), Snowflake (NYSE:SNOW), Elastic (NYSE:ESTC), and Confluent Inc (NASDAQ:CFLT), where increased AI efficiency could lead to higher application and query usage.

ServiceNow (NYSE:NOW) is also seen as a beneficiary as it is the first to market with an AI product that offers firmer seat-based pricing.

The implications for larger tech companies like Microsoft (NASDAQ:MSFT) are mixed. While Microsoft has exposure to OpenAI, it is not perceived as a structural threat due to the company's disciplined capex, especially in the context of the recent Stargate investment.

“MSFT also is a beneficiary of AI applications across Enterprises (CoPilot etc.), and rapid model efficiency gains could deliver significant margin improvement ahead should capital intensity be pared back faster than expected,” analysts added.

Meanwhile, Citi analysts voiced caution regarding software giant Oracle (NYSE:ORCL), which may face efficiency and return questions on its AI infrastructure investments with OpenAI.

In consumption software, the efficiency gains from DeepSeek's model are seen as potentially transformative, driving a significant increase in AI adoption. This could lead to an uptick in inferencing workloads for data platform players.

One company expected to witness a surge in demand for its AI products is Palantir (NASDAQ:PLTR), according to Citi.

“Palantir’s AIP has seen tremendous uptake with customers, and we do see the model breakthrough as potentially driving an increase in demand,” the firm said.

The collaboration and e-signature companies are also positioned to benefit. Citi highlights DocuSign (NASDAQ:DOCU), Zoom Video Communications (NASDAQ:ZM), and Nice Ltd ADR (NASDAQ:NICE).

These companies are expected to achieve better returns on investment due to more efficient AI models, which can be integrated into their products without additional costs.

In the vertical software space, companies like Autodesk (NASDAQ:ADSK), ANSYS (NASDAQ:ANSS), PTC (NASDAQ:PTC), CCC (WA:CCCP) Intelligent Solutions, Veeva Systems (NYSE:VEEV), and Tenable Holdings (NASDAQ:TENB) are in the early stages of AI adoption.

“The r1 model is generally positive for vertical software peers with the results showing similar performance to OpenAIs o1 but at a lower cost which should spur accelerated adoption of AI workflows where peers shied away from higher compute task because of cost considerations,” Citi explained.

Finally, front-office software providers such as Adobe (NASDAQ:ADBE), Salesforce (NYSE:CRM), HubSpot (NYSE:HUBS), and ZoomInfo Technologies Inc (NASDAQ:ZI) are also seen as beneficiaries of the DeepSeek model efficiency. However, the emergence of more efficient open-source models may increase competition, particularly for ZoomInfo's market and Adobe's lower-end offerings.

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