Another DeepSeek moment? What's really behind the tech sell-off
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Tech stocks are selling off Friday, continuing a poor week, and there could be more to the rout than meets the eye. The apparent trigger for the sell-off is a Thursday report from the New York Times that OpenAI is considering holding off on its initial public offering due to the lackluster performance of SpaceX shares following its own IPO, along with recent volatility in tech stocks. But analysts are pointing to a Chinese artificial intelligence model that looks like it could give OpenAI and its main competitor – Anthropic – a run for their money as a potentially much bigger problem for the tech sector. The launch of GLM5.2 by Hong Kong-listed Z.ai, formerly known as Zhipu AI, is "almost equal" to Anthropic at just a fraction of the price, a Jefferies strategist said. Such a cost advantage could take corporate customer share away from the U.S. frontier models ahead of their IPOs. "This new model is almost equal to Anthropic as a competitor for the corporate market and is just one quarter of the cost in terms of cost per token," Christopher Wood at Jefferies said in the note, citing industry sources. He described the past week to clients as "another DeepSeek moment." Traders at Morgan Stanley on Thursday said the new model from Z.ai has "very impressive coding capabilities." "Enterprises and hyperscalers trading down to cheaper models looks more like a recalibration in willingness to pay for AI, not a deterioration in demand for AI," the traders wrote. The price of high-end AI, which is measured in units called tokens, has been a growing concern for businesses, with multiple companies pulling back on their AI spending and blowing through their AI budgets in recent months. This has led to fears about a price war between OpenAI and Anthropic that could zap valuations prior to their listings. But cheaper open-source AI models that are almost as good as the frontier models are likely an even bigger threat to these expected IPOs and the broader tech sector along with it. "For the bulk of everyday tasks (perhaps 90% of them) [China's DeepSeek's V4-Pro] does much the same job at roughly 1.5% of the cost" of Anthropic's leading-edge Claude Fable 5 AI model, Deutsche Bank's Jim Reid wrote in a June 18 note to clients. The new model from Z.ai likely boasts privacy protections comparable to frontier models, analysts with Jefferies said in their Thursday note. This could lead companies to remove their AI workloads from cloud service providers and back onto their own servers, changing the investment for the AI buildout. "The demand mix is clearly shifting towards lower-cost models," Morgan Stanley traders wrote on Thursday. Between the cheaper international AI model threat and OpenAI reportedly rethinking IPO plans, it's raising concern that the astronomical trajectory forecast for infrastructure spending that's supporting the related stocks could be a bit too optimistic. Micron shares were off by 7% in early trading, while AMD and Intel were off by more than 4% apiece. Oracle is lower as well, capping a 19% decline over the last five days.