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The AI sector was rocked this week by a groundbreaking development from China’s DeepSeek, which unveiled a powerful large-language model (LLM), R1, that rivals its US counterparts—but potentially at a fraction of the cost. This disruptive move is forcing investors to reevaluate the market’s AI leaders, like Nvidia (NVDA), which saw its stock slide alongside other AI-related names such as Vertiv, Vistra, and Arista Networks.

However, this isn’t the end of AI investing. Instead, it’s an opportunity to shift focus toward other areas of the tech stack where growth and value are emerging. Companies like Meta Platforms (META), Amazon (AMZN), and Twilio (TWLO) are poised to benefit from this evolving AI landscape, with strong fundamentals and improving price momentum.

Image Source: Zacks Investment Research

DeepSeek Breakthrough Shakes AI Stocks

DeepSeek’s R1 model has altered the game by leveraging a cost-efficient approach to AI development. Operating under strict semiconductor import restrictions, the company achieved significant performance gains by optimizing low-level code and using an innovative training method that employs 8-bit floating-point numbers (FP8) instead of the traditional 32-bit precision.

This method dramatically reduces memory usage and improves performance, delivering sufficient accuracy for most AI workloads. More importantly, it undercuts the high costs associated with Nvidia's cutting-edge AI chips, which have been the backbone of recent AI advancements.

How the AI Stock Opportunities are Changing

DeepSeek’s breakthrough has broad implications. By proving that cutting-edge AI can be developed more cheaply, it enables big tech companies to potentially scale their AI efforts without relying as heavily on Nvidia’s high-priced chips. This, in turn, allows these companies to reallocate spending toward other areas, like software development, which has been overlooked amid the AI hardware boom.

The iShares Expanded Tech-Software Sector ETF (IGV) is one area to watch. Once considered at risk of being commoditized by AI, software is now set to benefit as companies look to build out AI-driven applications more cost-effectively.

Where to Invest Now

While Nvidia and its peers face headwinds, other stocks are emerging as compelling opportunities:

• Meta Platforms (META): A key player in AI-driven social media and advertising tools, Meta is well-positioned to leverage AI to optimize user engagement and monetization.

• Amazon (AMZN): As a Zacks Rank #2 (Buy) stock, Amazon is using AI across its e-commerce and AWS cloud platforms to maintain its leadership in both industries.

• Twilio (TWLO): A Zacks Rank #1 (Strong Buy), Twilio is integrating AI into its communication software offerings, driving strong price momentum and a promising growth trajectory.