DeepSeek
I am far (and I mean far) from an expert on semi-conductors and artificial intelligence (AI), although I do recognise the significant bets that investors have placed on the evolution of AI as a transformative technology globally. The sudden emergence of DeepSeek, a Chinese-based AI company, caught investors off-guard. DeepSeek is a company that seems to have developed a significantly lower cost version of open-source large language models, the basis for AI. The company’s emergence wrecked the entire AI value chain on Monday, none more severely than NVDA. Of course, DeepSeek had been discussed well before Monday, but it seems investors just started to fully grasp the potential transformative power of its low cost AI programme over the weekend. Monday’s session was important in that a potential broad market sell-off did not occur as initially feared, but anything and everything that is considered “picks & shovels” in the AI value chain was repriced significantly. I have small positions in both NVDA and ASML, and both were hammered, with NVDA down 17% and ASML down nearly 6% on Monday. Ouch!! NVDA bounced a bit yesterday, but ASML took another leg down. I added scraps to both positions on Monday afternoon, not because I have incredible foresight, but rather because these things often get overdone. I am keen to learn more about DeepSeek in the coming days, to see if this is the tip of the iceberg or an over-reaction.
ASML earnings
ASML is the Dutch-based maker of precision lithography machines used in the manufacture of semiconductors. (You can learn more about the chip value chain here.) Conveniently, the company released its 4Q24 earnings this morning which were very strong across the board. The company has stuck with its 2025 guidance, including maintaining its gross margin target of 51% to 53%. DeepSeek has been too recent for this round of earnings to include anything substantive in the formal press release (which does not mention it), but it is certain to come up this morning when the ASML CEO and CFO hold a press conference at 11am CET (webcast access here). There will be another call at 3pm CET (9am EST) with the CEO and CFO involving the media and investors. The stock is up around 11% this morning in the European pre-market. I expect it to be volatile today depending on the two press conferences that are pending.
Mag 7 Earnings
Four of the infamous “Mag 7” companies report earnings this week, and this timing could not be better to get these tech giant’s views regarding the emergence of DeepSeek and a potentially much lower cost but equally effective (TBD) approach to AI. On Wednesday, MSFT, META and TSLA report after the bell, and on Thursday, AAPL reports its earnings. Next week, GOOG (Alphabet) reports on Tuesday after the close, and AMZN reports on Thursday. The table below provides reporting and share information, as well as some rudimentary valuation metrics. AAPL and TSLA will be the most interesting, mainly because AAPL has seen its stock under pressure (until this week) due to uninspiring growth, especially in the iPhone 16, and TSLA has had weak unit sales growth for several quarters now and remains wildly over-valued.
FOMC Decision
Before we get earnings today after the close from MSFT, META and TSLA, we will get the FOMC decision, followed by a Q&A session involving the Chairman of the Fed, Jerome Powell. It is almost certain that the Fed will not change the Fed Funds rate, which would be the first pause following three consecutive FOMC meetings during which the Fed Funds rate has been decreased by 100bps. In fact, the CME FedWatch tool shows that investors do not expect a decrease in the Fed Fund rates until June (25bps), with a second reduction (25bps) expected in October. More recently, I have even read that some pundits expect that the Fed might raise the Fed Funds rate again in 2025 if inflation starts to reignite, not at all out of the realm of possibility given policies of the Trump Administration. What is certain is that inflation appears to be stalled while at the same time, the US economy continues to fire on all cylinders, not a recipe for easing monetary policy. As predictable as the FOMC decision is this afternoon, I suspect it is equally predictable that President Trump will moan and complain, showing his blatant lack of understanding of economics. At least it will add some entertainment value to a very obvious decision.