Why Wall Street is worried about a 'made-in-China AI model'; More bullish details on Tripadvisor; Six points about getting better sleep

1) Artificial intelligence ("AI") is rattling the markets...

The tech-heavy Nasdaq Composite Index is down about 3% this morning primarily because of fears over a Chinese AI startup, DeepSeek. The company spends far less than other AI companies by using cheaper chips but appears to deliver comparable performance.

This article in today's Wall Street Journal has more on the story: Silicon Valley Is Raving About a Made-in-China AI Model. Excerpt:

AI models from DeepSeek, the Chinese company, have zoomed to the global top 10 in performance, according to a popular ranking, suggesting Washington's export curbs are having difficulty blocking rapid advances in China.

On Jan. 20, DeepSeek introduced R1, a specialized model designed for complex problem-solving.

"[DeepSeek] R1 is one of the most amazing and impressive breakthroughs I've ever seen," said Marc Andreessen, the Silicon Valley venture capitalist who has been advising President Trump, in an X post on Friday...

Specialists said DeepSeek's technology still trails that of OpenAI and Google. But it is a close rival despite using fewer and less-advanced chips, and in some cases skipping steps that U.S. developers considered essential.

Despite its extremely low cost, DeepSeek's performance is exceptional – as the article continues:

DeepSeek said training one of its latest models cost $5.6 million, compared with the $100 million to $1 billion range cited last year by Dario Amodei, chief executive of the AI developer Anthropic, as the cost of building a model...

DeepSeek said R1 and V3 both performed better than or close to leading Western models. As of Saturday, the two models were ranked in the top 10 on Chatbot Arena, a platform hosted by University of California, Berkeley, researchers that rates chatbot performance. A Google Gemini model was in the top spot, while DeepSeek bested Anthropic's Claude and Grok from Elon Musk's xAI.

Given how much of the gains in tech stocks over the past year have been driven by investor enthusiasm for AI, it's not surprising that the sector would take a hit on news of a new, foreign, and low-cost competitive threat.

But how much of a threat is it? For answers, I came across this thread from yesterday on social platform X. Excerpt:

The New York Times' DealBook asks some interesting questions: DeepSeek Forces a Global Technology Reckoning. Excerpt:

• Do leading A.I. companies like Google, Meta and the privately held OpenAI and Anthropic deserve their astronomical valuations?
• Do companies need to spend hundreds of billions on vast data centers powered by hugely expensive chips from Nvidia and others? Consider that OpenAI and its partners have promised to spend at least $100 billion on their Stargate project, or that Microsoft said it will spend $80 billion, or Meta $65 billion.
• Does America need the huge uptick in electricity generation that has fueled a run-up in utility stocks?

I discussed the news with one of my former students, Artem Fokin of investment firm Caro-Kann Capital, who wrote:

Personally, I am super excited about DeepSeek.

First, it's an awesome story – classic David vs. Goliath.

Second, it would make all Big Tech who has been spending billions on AI look dumb.

Third, AI will be a lot more affordable and accessible to tons of companies – from big ones to start-ups, which I think is better for society.

My analyst Kevin DeCamp added:

This seems bearish for Nvidia (NVDA) and bullish for everything else (less capital expenditures needed over time for big tech and lower cost/faster innovation in AI is good for the economy and most other companies).

Also, it makes me think Apple (AAPL) was right to hold off on massive capital expenditures on AI, even though its AI sucks for now?

I think Kevin is right: DeepSeek's emergence is bad news for the companies selling the chips and other technology underlying AI, but is great news for the buyers and end consumers.

Consider one of my favorite big-cap tech stocks, Meta Platforms (META), which recently announced that it was planning to spend $60 billion to $65 billion on AI this year. This recent WSJ article has more details: Meta Aims to Be AI Spending Champ. Excerpt:

Mark Zuckerberg is back to moving fast and breaking things – including his own company's spending records.

The founder and CEO of Meta Platforms took to his company's Facebook platform Friday morning to announce plans to spend between $60 billion and $65 billion in capital expenditures this year. Those are huge numbers for a few reasons. One, the midpoint of the range is up 60% from the record amount Meta is estimated to have spent in 2024. And it is well above the $51.4 billion analysts expected for the year, based on consensus estimates from Visible Alpha.

More notably, Zuckerberg's plan would have Meta devoting a little over one-third of the company's total revenue for the year to capex, based on [analysts'] current projections. That's well above even the elevated spending of other megacap tech companies.

In light of what DeepSeek has now shown is possible, in the not-too-distant future Meta might be able to achieve its AI goals for, say, half of what it's planning to spend... which would drop more than $30 billion of pretax profits to its bottom line!

2) Following up on Friday's e-mail, my friend and former business partner Glenn Tongue has some additional color on online travel agency Tripadvisor (TRIP) for my readers:

In addition to filing a merger proxy agreement last Thursday, the company also filed a Schedule 13-E3 form that [relates] to the background of the merger.

At the end of this filing are links to more than a dozen presentations by investment bank Centerview Partners, known as the best special committee advisor in the business, to Tripadvisor's board, which are chock full of hints about what's going on.

Centerview's discounted cash flow analysis is very conservative, but still results in a valuation in the low $20s, which is good considering that the stock closed Friday at $17.66 [per share].

Another deck discussed the universe of buyers for the business, which is a robust group to say the least.

And as Glenn continued:

You will recall that I mentioned on Friday that one industrial buyer named Party 7 (which I believe is code named "Lindbergh" in the decks) recently proposed buying TRIP for $18-$19 per share. Through the proxy, we learned that Lindbergh engaged with the company in October.

But back then, none of the strategic players would have bothered to try to buy TRIP because there is no way the Biden administration would have granted antitrust clearance.

But today, under the new administration, an acquisition is much more likely to be approved, which makes it much more likely that a strategic acquirer will end up buying TRIP, so I believe there will now be a bidding war for the company.

That sounds promising. However, Glenn cautioned that there are still risks:

This situation has unique and complicated risks. The most obvious is that all potential bidders might walk away.

There is also an unusual corporate structure, with Liberty TripAdvisor having voting control while also being insolvent. Might someone buy Liberty TripAdvisor to gain control of Tripadvisor, leaving TRIP holders without a liquidity event? It's possible, but I think unlikely because it massively complicates the ultimate acquisition of TRIP.

Finally, I'm aware that "sum-of-the-parts" and "it will get acquired" are often the last refuges of bagholders of failed tech businesses, and the usual arguments by value/special-situations newcomers to those businesses.

Weighing all this, Glenn is still optimistic for upside ahead for Tripadvisor's stock:

This saga will play out soon. So far, I believe the facts remain skewed in favor of a higher stock price.

Thank you for the extra insights, Glenn! I continue to think you're right on this one...

3) I've written many times about the importance of sleep, so I read this recent New York Times article with interest: 6 Things We Get Wrong About Sleep. Excerpt:

There's no question that sleep is important for your health. Without enough of it, your risk of developing diseases such as dementia, high blood pressure and Type 2 diabetes can increase, and you're more likely to feel irritable and anxious.

In pursuit of a perfect night's rest, some people have tried drinking "sleepy girl mocktails" or invested in elaborate nighttime routines. But many of these solutions aren't backed by research, and they won't address underlying sleep hygiene issues.

The article covers these six points:

• You can't train your body to need less sleep.
• More sleep isn't always better.
• You can't make up for lost sleep over the weekend.
• Waking up during the night isn't always a sign of poor sleep.
• Grogginess isn't always cause for concern.
• Snoring isn't always harmless.

I used to view sleep as a necessary evil – something to be minimized so that I could be more productive.

But after studying the research on this topic – and failing miserably the one time I tried to train my body to need less sleep – I now realize that averaging eight hours a night is critical to maintaining my physical and mental health. So that's what I aim for, even with my unusually hectic schedule these days!

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.