What is DeepSeek, the Chinese AI company upending the stock market?

That, if true, calls into question the huge amounts of money U.S. tech companies say they plan to spend on the data centers and computer chips needed to power further AI advancements.

But hype and misconceptions about DeepSeek's technological advancements also sowed confusion.

"The models they built are fantastic, but they aren't miracles either," said Bernstein analyst Stacy Rasgon, who follows the semiconductor industry and was one of several stock analysts describing Wall Street's reaction as overblown.

"They're not using any innovations that are unknown or secret or anything like that," Rasgon said. "These are things that everybody's experimenting with."

What is DeepSeek?

The startup DeepSeek was founded in 2023 in Hangzhou, China and released its first AI large language model later that year. Its CEO Liang Wenfeng previously co-founded one of China's top hedge funds, High-Flyer, which focuses on AI-driven quantitative trading.

DeepSeek began attracting more attention in the AI industry last month when it released a new AI model that it boasted was on par with similar models from U.S. companies such as ChatGPT maker OpenAI, and was more cost-effective in its use of expensive Nvidia chips to train the system on huge troves of data. The chatbot became more widely accessible when it appeared on Apple and Google app stores early this year.

But it was a follow-up research paper published last week — on the same day as President Donald Trump's inauguration — that set in motion the panic that followed. That paper was about another DeepSeek AI model called R1 that showed advanced "reasoning" skills — such as the ability to rethink its approach to a math problem — and was significantly cheaper than a similar model sold by OpenAI called o1.

"What their economics look like, I have no idea," Rasgon said. "But I think the price points freaked people out."

The 'Sputnik' backdrop

Behind the drama over DeepSeek's technical capabilities is a debate within the U.S. over how best to compete with China on AI.

"Deepseek R1 is AI's Sputnik moment," said venture capitalist Marc Andreessen in a Sunday post on social platform X, referencing the 1957 satellite launch that set off a Cold War space exploration race between the Soviet Union and the U.S.

Andreessen, who has advised Trump on tech policy, has warned that over regulation of the AI industry by the U.S. government will hinder American companies and enable China to get ahead.

But the attention on DeepSeek also threatens to undermine a key strategy of U.S. foreign policy in recent years to restrict the sale of American-designed AI semiconductors to China. Some experts on U.S.-China relations don't think that is an accident.

"The technology innovation is real, but the timing of the release is political in nature," said Gregory Allen, director of the Wadhwani AI Center at the Center for Strategic and International Studies. Allen compared DeepSeek's announcement last week to U.S.-sanctioned Chinese company Huawei's release of a new phone during diplomatic discussions over Biden administration export controls in 2023.

"Trying to show that the export controls are futile or counterproductive is a really important goal of Chinese foreign policy right now," Allen said.

Trump signed an order on his first day in office last week that said his administration would "identify and eliminate loopholes in existing export controls," signaling that he is likely to continue and harden Biden's approach.

Nvidia's stock dropped 18% Monday, but the company in a statement commended DeepSeek's work as "an excellent AI advancement" that leveraged "widely-available models and compute that is fully export control compliant."