DeepSeek's new R1 reasoning model is dragging down the NASDAQ. It dropped 6 days ago but it seems Wall Street is only now digesting what it means. I'm no equity analyst, but a few things I've been thinking about. DeepSeek is a huge deflationary shock to the price of intelligence. R1 is outcompeting OpenAI's O1 model for likely less than 1/20th the cost, and they are doing it with only 32B active parameters (GPT-4 likely used ~220B active parameters according to @SemiAnalysis_). They also fully open sourced all of their models, the distillations, and a comprehensive paper detailing how they did it. Intelligence is now way cheaper than we thought. This is great for all consumers of AI—meaning you and me. So why is the NASDAQ tanking? Remember, the NASDAQ is an index of producers, not consumers. The price of oil plummeting is bad news for oil companies, but it's great for those of us who drive. The fact that NVIDIA and all of the hyperscalers are so overrepresented in the NASDAQ these days means the stock market is structurally long the price of intelligence. So who benefits from this deflationary shock? I think there is one company in particular that is best positioned now. It's now been more than 2 years since the release of ChatGPT, and it's clear that no lab has that much of an edge. It only takes a few months for Google, OpenAI, Anthropic, and now DeepSeek to copy each other and trade spots on the leaderboard. This is partly because these companies all publish research (researchers want glory) and even for stuff that's unpublished, these organizations leak like sieves. Engineers want to know how things work. It's quite literally the most interesting question in the world: what is intelligence made of? Labs are just not able to hide this without military grade secrecy (and none of the best talent wants to work for the military). So we're stuck in this status quo. Everyone is trading places at the top of the leaderboard, nobody has a clear long-term edge, and DeepSeek and Meta are intent on open sourcing their models, which causes closed models to continually depreciate. Even with all this AI spend, there don't seem to be any durable moats. So who does have a structural moat here? Look at OpenAI. Sora is already behind the state of the art on video (Kling and Veo are racing ahead). Dall-E is OK but no longer best in class. They are now betting hard on Operator, which is their agentic model. Operator is supposed to be able to book flights, order food, do agentic stuff for you. But it has significant problems aside from the coherence of the model itself: If you are working directly with one of their partners like Instacart, Operator gets full access. But much of the open web appears to be blocking Operator, and that may get exacerbated if the web is crawling with Operator instances. You also have to keep handing control back and forth to log in and out of services, solve Captchas—it's all quite cumbersome and finnicky. Take Google on the other hand. Gemini is quietly #1 on @lmarena_ai. They are #1 on image generation with Imagen. They are ahead on video with Veo. They aren't doing anything agentic yet—Google is usually the last mover on the sexier stuff—but once they do, they have a huge structural advantage. Google's webcrawler bots already have full license to touch everything on the web. They already have access to your Gmail, calendar, they can easily traverse the web and have cached most of it (DeepResearch shows how easy this is for Google), and they also have the crown jewel of untapped data: Youtube. And, of course, they are uniquely positioned to drive agents directly on Androids. Although Google is spending a ton on compute, and they are still a hyperscaler, Google is net short intelligence. They are a consumer of AI in order to serve their customers. DeepSeek and this intelligence deflation is long term good for Google, as it means their own spend will go down. It's cool to hate on Google these days, but I think Google ends up being the long-term winner here if DeepSeek-R1 spells a secular trend. That said, don't count out OpenAI. They are still the strongest product company, and they've earned trust from consumers and enterprises for always being 3 months ahead of the rest of the market. They basically invented the entire test-time compute paradigm, and o3 is a real breakthrough which has yet to drop. If intelligence is the most valuable resource in the world, being 3 months ahead of the competition is enough to earn themselves a big premium, and huge enduring trust from their customers. So yes, the biggest loser here is NVIDIA. If China is a real player (and NVIDIA is not allowed to export to China), and DeepSeek is massively deflating the price of intelligence, and they were able to do all of this on nerfed H800 chips, then NVIDIA is in trouble. You want to be in the game of selling intelligence. NVIDIA is in the game of selling FLOPs. If the ratio of FLOPs to intelligence goes down, down goes NVIDIA stock. So it goes. And of course, we have to say it: congrats to @deepseek_ai team in wiping out a trillion dollars of equity value from the NASDAQ. That's six OpenAIs in a single day, vaporized. Not bad. 👍