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Investing.com-- Shares of Chinese software companies have surged 38% in two weeks following the release of DeepSeek’s (DS) R1 model, significantly outperforming the 21% rally seen over three months in early 2023 after the launch of ChatGPT, Jefferies analysts said in a research note.
The analysts believe the rally has further room to grow, citing the low-cost and open-source nature of the DS model, which could improve the prospects of Chinese software firms in artificial intelligence. However, tangible evidence of AI monetization is likely a year away.
Despite the recent gains, Jefferies noted that the sector remains undervalued compared to its 2023 peak. The current market cap increase for the software sector is only 70% of the previous AI-fueled surge, analysts said.
DeepSeek's local presence and open-source model could provide Chinese software companies with an advantage, Jefferies said.
Unlike ChatGPT, which has restricted access in China, DS is easily deployable, can be self-hosted, and integrates well with private and cloud environments. This flexibility could accelerate cloud adoption and AI integration among Chinese enterprises, Jefferies analyst wrote.
They also noted that macroeconomic conditions are now more favorable for stocks than during the ChatGPT rally in 2023, as China’s economy has likely bottomed out, government stimulus measures are increasing, and U.S.-China tensions have not worsened under the current U.S. administration.
Jefferies' top software stock picks include Kingdee International Software (HK:0268), Zhejiang Supcon Technology (SS:688777), Shanghai Baosight Software Co (SS:600845), AsiaInfo Technologies Ltd (HK:1675), and Hundsun Technologies Inc (SS:600570), though the firm emphasized that its bullish view on these companies is not yet based on AI monetization.