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Investing.com -- UBS analysts defended Chinese internet data center operator VNET amid a broader selloff triggered by DeepSeek's recent AI advancements, reaffirming a Buy rating on the stock.
While DeepSeek's low-cost, high-performance AI model raised concerns about reduced AI computing demand, UBS argued that data centers like VNET stand to benefit in the long run.
DeepSeek’s reasoning-focused AI model, DeepSeek-R1, has been hailed as “top performing, or roughly on par with the best American models,” according to Scale AI’s CEO.
Its cost efficiency has been a particular focus, with VentureBeat reporting that DeepSeek Reasoner costs just $0.55 per million input tokens and $2.19 per million output tokens, compared to OpenAI’s $15 and $60 for input and output tokens, respectively.
UBS noted that in 2024, AI training workloads in China drove over 80-90% of internet data center (IDC) demand, primarily in remote areas to minimize utility costs.
However, with lower AI training and inference costs, UBS expects demand to shift toward retail customers who prioritize user latency over utility costs.
They believe this change could enhance pricing power for IDC operators in premium locations, such as tier-1 cities and their satellites.
VNET is well-positioned to capitalize on this trend, according to the bank.
“Location would come back as a top consideration factor for a more diversified customer portfolio, which should benefit VNET,” UBS stated, highlighting the company's strong resources in Beijing and reserves in Hebei.
Despite near-term sentiment concerns, UBS believes VNET’s fundamentals remain strong, supported by secured wholesale orders and low valuation at 10x 2025 EV/EBITDA. Additionally, UBS sees potential upside from retail IDC assets being injected into public REITs at higher multiples.
UBS concluded, “We reiterate Buy on VNET and GDS,” emphasizing long-term resilience and opportunities in a rapidly evolving AI-driven market.