LIVE MARKETS-Could bets on picks and shovels be a mistake?

Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

COULD BETS ON PICKS AND SHOVELS BE A MISTAKE?

After the shock of Monday's artificial intelligence related market stumble, investors may have to rethink how best to place their bets on the burgeoning technology.

Cresset Capital's chief investment officer Jack Ablin is looking to the evolution of the internet for signposts.

First he lists three sets of AI market participants: the hardware providers, which include chip companies lead by Nvidia NVDA.O; the platform providers, which include companies like Microsoft MSFT.O and Google, whose parent is Alphabet GOOGL.O and data center operators and last but not least, the beneficiaries or corporate users of the technology.

"If we go back to the internet innovation, far and away the beneficiaries' stocks benefited the most. The others peaked early and then handed the baton over to the beneficiaries," said Ablin.

"Think about Cisco, Microsoft and Netscape and then Amazon," he said referring to the early investor enthusiasm for network equipment and internet browsers, which eventually leveled out.

"Amazon was by far and away the biggest beneficiary of the internet. Amazon had nothing to do with inventing the internet. They just benefited from it."

Fast forward to the world of generative AI, where Nvidia has been stunning investors in recent years with early and ongoing successes in selling to tech companies and AI startups desperate to get ahead in the emerging field. As a result Nvidia shares rose more than 171% in 2024 after climbing almost 239% in 2023 as it became the 'it' stock that everybody had to own.

Then enter DeepSeek, a Chinese startup that last week launched a free AI assistant it says uses less data at a fraction of the cost of incumbents. By Monday, the assistant had overtaken U.S. rival ChatGPT in Apple's app store downloads. Then investors started unloading their AI bets on worries that DeepSeek's accomplishments would mean less demand for advanced chips from Nvidia and power-hungry data centers.

To be sure, investors still have questions as to how much more efficient DeepSeek's system really is.

But as Ablin said, they have been "sharpening their pencils and trying to figure" out whether they should reconsider the way that they're betting on AI.

"Nvdia and chip companies are the hardware - the picks and shovels of this innovation. We expect them at some point to fall by the wayside. Maybe this accelerates that. Maybe we don't need as much hardware as we originally thought," he said.

But Ablin notes that it is still unclear who the Amazon equivalent of the AI world will be.

"That's really the fun part, figuring out what firms and industries benefit the most," he said.

"We're assuming for example that pharma and biotech would be among the biggest beneficiaries just because of the amount of data they have and their ability to really innovate based on intelligently organizing the data that they already have."

Meanwhile, Nvidia shares were down 3.2% at $119.74, above their Monday close, but well below where they were trading before the investing world became aware of DeepSeek. Nvidia's Friday's close was $142.62.

(Sinéad Carew)

*****

FOR THURSDAY'S EARLIER LIVE MARKETS POSTS:

RETAIL TRADERS BOUGHT THE DIP AS NVIDIA SAW ITS BIGGEST WIPEOUT ON RECORD - CLICK HERE

THURSDAY DATA ROUNDUP: GDP, JOBLESS CLAIMS, PENDING HOME SALES - CLICK HERE

U.S. STOCKS CLIMB ON META LIFT BUT MICROSOFT WEIGHS - CLICK HERE

BANKS BRIGHTEN, TECH TARNISHED, TO KICK OFF 2025 - CLICK HERE

"TARIFF MAN IS COMING" - BRACE YOURSELF - CLICK HERE

'JEVONS PARADOX': A NEW BUZZWORD AFTER DEEPSEEK AI SELL-OFF - CLICK HERE

FRANKFURT TOPS THE CHARTS, MADRID BACK TO 2008 LEVELS - CLICK HERE

BEFORE THE BELL: MAG7 MIXED, BIG EARNINGS DAY IN EUROPE - CLICK HERE

ECB UP NEXT AFTER FED LACKS CLARITY - CLICK HERE