RBC Capital sees DeepSeek AI as potential threat to MSFT, ORCL

Tuesday, shares of technology giants, including Nvidia (NASDAQ:NVDA), Oracle (NYSE:ORCL), and Microsoft (NASDAQ:MSFT), experienced significant declines in pre-market trading following a report that DeepSeek’s AI assistant has surpassed ChatGPT as the top-rated free application on the Apple (NASDAQ:AAPL) App Store. According to InvestingPro data, the tech sector’s volatility contrasts with companies like NICE Systems, which maintains a strong financial health score of 3.09 (rated "GREAT") and a conservative debt-to-equity ratio of 0.16. RBC Capital analysts noted the open-source reasoning models of DeepSeek could pose a threat to the commercialized models of these companies, particularly as its capabilities have reportedly outperformed those of top US-based commercial models.

Nvidia stock fell by 16%, Oracle shares dropped 12%, and Microsoft stock declined 4%, outpacing the 1% downturn of the iShares Expanded Tech-Software Sector ETF (IGV) by 12:30 pm ET. While the initial sell-off was followed by a positive turn for many software companies, InvestingPro subscribers can access comprehensive analysis of over 1,400 stocks, including detailed Fair Value assessments and financial health metrics to navigate market volatility effectively. The emergence of DeepSeek reignites discussions about the commoditization of large language models (LLMs) and open-source software, a longstanding concern for investors.

Despite concerns over open-source LLMs closing the gap with proprietary models like OpenAI’s GPT, RBC Capital analysts see the potential commoditization as a net positive for software companies not tied to a specific LLM vendor. The analysts believe that driving down the cost of LLM usage could benefit software companies by allowing them to price their generative AI (GenAI) offerings more competitively and drive greater volume, with less impact on gross margins.

Looking ahead, the analysts expect the market to refocus on fundamentals, with Microsoft and ServiceNow (NYSE:NOW) set to report earnings after the market closes on Wednesday. These reports should provide insight into the companies’ perspectives on GenAI trends.

For Microsoft, the rise of DeepSeek presents a complex scenario. While the company’s relationship with OpenAI is integral to its strategy, Microsoft has designed its applications, such as GitHub Copilot and M365 Copilot, to be compatible with any LLM. The analysts believe Microsoft and OpenAI are likely to remain well-positioned in the GenAI space and suggest that any weakness in Microsoft’s share price could be a buying opportunity.

Oracle’s situation is described as more mixed. The growth of Oracle Cloud Infrastructure (OCI) has been partly attributed to its use of Nvidia GPU allocations. If DeepSeek’s R1 model can achieve greater capital efficiency, it may reduce the benefits Oracle has seen from excess capacity. For investors seeking stability in the tech sector, InvestingPro analysis reveals companies like NICE Systems demonstrate strong fundamentals with a 66.7% gross profit margin and robust cash flows that sufficiently cover interest payments.

In other recent news, NICE Ltd. reported a 15% year-over-year increase in total revenue for the third quarter, totaling $690 million. The company’s cloud revenue also grew by 24%, reaching $500 million, while earnings per share rose by 27% to $2.88. However, NICE’s organic cloud growth was slightly below expectations, leading to revised forecasts from Mizuho (NYSE:MFG), DA Davidson, and Citi.

In response, Jefferies downgraded NICE from Buy to Hold due to concerns about the company’s cloud revenue growth projections. Mizuho, DA Davidson, and Citi also revised their price targets for NICE Systems, citing the same concern. Despite these adjustments, all firms maintain a positive outlook for NICE, highlighting its potential for future growth.

In terms of recent developments, NICE Ltd. announced a partnership with Creand Crèdit Andorrà to expand its anti-money laundering strategy globally. The company also launched CXone Mpower SmartSpeak, aimed at eliminating language barriers in real-time. Lastly, NICE announced a CEO transition from Barak Eilam to Scott Russell. These recent developments provide insights into NICE’s strategic direction and growth trajectory.

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