Over the last 36 hours, you’ve likely encountered ample commentary on DeepSeek-R1—from The Economist and The Wall Street Journal to YouTube and X. I won’t revisit the well-covered details here. Instead, I want to address a less-explored question: what’s next?
Before diving in, let me briefly update you on our portfolio. As mentioned in my last quarterly letter, “when the going gets tough, the tough get going.” Thanks to our hedges, equal-weight S&P 500 index positions, gold, and cash holdings, our portfolio declined just 0.5% yesterday. In contrast, global indices fell between 1.3% and 3.5%. Meanwhile, Nvidia crashed 17%, and many in the semiconductor supply chain, like Vertiv Holdings (a data center cooling equipment provider), cratered by as much as 30%.
DeepSeek and the Nvidia thesis
DeepSeek-R1 represents a watershed moment in the AI/LLM infrastructure ecosystem. Trained on less powerful H800 GPUs and achieving 50x greater efficiency, it challenges the industry-wide need for Nvidia's high-margin, cutting-edge GPUs like the Hopper H100 and upcoming Blackwell B200. If this thesis proves correct, Nvidia’s revenue and margin projections will look materially different than they did just a few days ago. Barring new findings, it’s reasonable to infer that Nvidia’s 17% crash yesterday marks a permanent reset—for now.
While we may see FOMO buying in the short term, these moments often give institutional investors a highly coveted opportunity to exit. For experienced investors, this behavior is not surprising at all. Needless to say, please do not follow the “buy the dip” crowd or heed analysts touting their books on financial news channels (whose bread I eat, their song I sing.) To be clear, I have not made a single decision till date based on any sell-side analyst recommendations and if our 13-year track record is any indication, we haven't missed much.
Nvidia and the Hyperscaler thesis
This impact on Nvidia inevitably extends to the hyperscalers that drive much of its revenue. The disruption caused by DeepSeek-R1 will most certainly lead hyperscalers like Microsoft, Google, and Amazon—as well as Meta, which has been critical to Nvidia’s top line—to re-calibrate their capital expenditure plans. For now, Bay Area engineers are likely scrambling to integrate DeepSeek-R1’s efficiencies into their existing LLMs. Once this process concludes, we’ll have clearer visibility into potential reductions in CapEx budgets and extensions in outlay timelines.
Interestingly, Apple’s superior hardware ecosystem, Meta’s open-source LLM leadership, and Amazon’s pragmatic focus on productivity applications may help them weather this storm better than others in the Mag7 cohort. Meanwhile, the commoditization of the infrastructure layer in AI makes identifying sustainable moats in the application layer increasingly important. Our portfolio likely owns some potential winners of this disruption, refer to the Top Holdings in our 4Q24 factsheet.
Passive investing and market dynamics
Beyond the DeepSeek, Nvidia and Hyperscaler fundamentals shared above, it’s critical to consider the market fabric, especially the technicals and the flows. With 60% of equity market flows now passive, price-agnostic momentum strategies and index funds dominate. Layer this with Nvidia, the Mag7, and the semiconductor ecosystem occupying outsized weights in these strategies and index funds. As a result, it remains very likely we see additional outflows from these pockets, whether they occur in bouts of panic like yesterday or via orderly selling over the next few days and weeks.
Having reduced our exposure to the Mag7 and related names over the past two quarters, we’re in the privileged position of skipping this roller-coaster ride and simply observing from the side.
Closing thoughts
It is clear that DeepSeek has altered the AI/LLM ecosystem, industry dynamics and future profit pools, likely meaningfully. And perhaps, also made a small dent in the global geopolitical equilibrium as the world races for AI dominance. While the future will always remain unknown, our ethos of preparing for all economic seasons and our discipline to remain unfazed by the market's behavior continues to hold us in good stead consistently. As always, thank you for your trust, and I look forward to updating you further in the weeks ahead.
Sincerely,
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