Investing.com -- DeepSeek’s recent breakthrough in the AI space is neither an exception nor a miracle, but rather "the latest milestone achievement in the development of China’s ecosystem" that has demonstrated capabilities in some areas that are competitive with global solutions, according to Bernstein analysts.
However, the analysts believe that DeepSeek's success is tied to China's unique enterprise landscape, requiring more customization and higher servicing.
“The read-across for Global AI is this means that outside of such an ecosystem, DeepSeek is potentially less able to scale,” analysts led by Boris Van said in a Wednesday note.
Bernstein predicts a shift in China's AI focus from foundational models to application development, with an emphasis on Open Source ecosystems. This transition is expected to lower foundational model costs and accelerate the development of customized applications, making AI development more competitive due to the ease of replicating models at reduced costs.
The firm identifies potential winners in this evolving market as those capable of monetizing AI through volume uplift or application development, without succumbing to price wars over commoditized components.
It favors cloud providers with comprehensive data infrastructure capabilities, enterprise software with robust subscription models, and leading IT services with strong client use cases.
At the same time, Bernstein analysts are bearish on companies solely engaged in repackaging compute power and model development.
The report also evaluates which internet platforms are best positioned to monetize their AI investments, considering the risks of rapid copying and the normalization of AI features.
Bernstein highlights industry verticals and platforms with unique media content as likely winners, though it notes that the impact of AI “will likely be longer term.”
In terms of specific stock picks, Bernstein voiced a positive outlook on Kingdee (HK: 0268 ), citing its formidable mid-enterprise platform, and Beijing Kingsoft Office Software (ETR: SOWGn ) In (SS: 688111 ) for its proven track record and potential in AI monetization across consumer and enterprise products.
However, they suggest that the second half of the year might offer a better entry point for these stocks.
On the other hand, the brokerage is negative on Baidu (NASDAQ: BIDU ), viewing it as “a share loser in Search” and less competitive in the AI cloud sector within an Open Source era.
Bernstein is also bullish on the setup for Trip.com Group Ltd ADR (NASDAQ: TCOM ) and Tencent Music Entertainment Group (NYSE: TME ) but anticipates that the benefits to their cost base and business optimization will take time to materialize, ultimately contributing to a longer-term positive impact on their earnings per share (EPS) growth.