That probably won't be the case forever. In January 2025, DeepSeek, a Chinese AI company, shook up the stock market after revealing it was able to build AI models for far less than what U.S. companies are spending. It does so through distillation, a process in which a larger AI model trains a smaller, more specialized model. Initial reports indicated that DeepSeek built its AI model for $6 million through the distillation process.
Analysts suggest that the $6 million price tag DeepSeek reported only includes the cost of pretraining for the model that was released and does not account for other costs necessary to build the entire model. A report by SemiAnalysis estimates that DeepSeek’s capex actually is about $1.6 billion.
While AI training is still far from cheap, DeepSeek’s success might serve as a proof of concept that distillation could significantly lower training costs in the future.
Should investors be worried about AI leaders' massive capital expenditures?
Some of the largest companies in the world are making big bets on AI. They're treating it like the next wave of innovation and ramping up their capex spending accordingly.
It's a high-risk, high-reward strategy dependent on AI continuing to require tens of billions of dollars’ worth of investment and generating enough revenue to be worth the cost. If it turns out that training and running AI models can be done for less, then significant capex on AI could become an expensive mistake -- which is why share prices for tech companies dropped after DeepSeek’s reveal.
AI might also not be as much of a revenue driver as expected. In that situation, AI companies will have all the expenses of building data centers on their balance sheets without a sufficient increase in revenue, leaving investors with disappointing returns.
Investors, particularly those who have invested heavily in tech stocks, should stay up to date about the latest developments in AI. Even with the aforementioned risks, the fact that big businesses are putting billions of dollars into AI is a promising sign.
