Exploring DeepSeek's strategic options for a successful IPO

When could the DeepSeek IPO take place?

While a DeepSeek initial public offering (IPO) would likely be an extremely popular listing, there has not yet been any strong indication that the privately held company plans to launch an IPO soon.

Challenges and opportunities for a US listing

The company was founded by Chief Executive Officer (CEO) Liang Wenfeng after creating a quant hedge fund with some $8 billion of assets under management. Given the significant Sino-United States (US) tensions on artificial intelligence (AI) development and potential US national security concerns, especially those related to TikTok, DeepSeek might face challenges in launching an IPO in the US. Additionally, China's crackdown on platform stocks like Alibaba further complicates prospects.

However, a US listing would likely give the company a higher valuation and access to deeper liquidity. It could also position DeepSeek to compete directly with established US AI players.

Another option may be a secondary Hong Kong listing in addition to one in China, which would make it readily accessible in the west. This is a common share structure for many larger Chinese companies.

Potential for a secondary Hong Kong listing

DeepSeek might consider a secondary listing in Hong Kong alongside one in China, making its shares more accessible in the west. This dual-listing structure is common among larger Chinese companies.

Valuation and share price

DeepSeek is a privately held AI start-up, so financial data is currently unavailable. For benchmarks, consider Microsoft-backed OpenAI, valued at approximately $157 billion after a recent fundraising round of $6.6 billion. Meanwhile, Anthropic is reportedly raising $2 billion valuing the company at $60 billion.

With DeepSeek operating on a smaller budget but backed by Chinese investors, its initial valuation might be around $10 billion, though it could vary. The share price would likely aim to compete with major US tech stocks.

Challenges in valuing DeepSeek

The absence of financial data makes valuing DeepSeek challenging. However, the strong performance of AI IPOs, like the recent ARM IPO, suggests DeepSeek could attract many institutional and retail investors.

Exploring DeepSeek’s business model

DeepSeek offers free AI models for researchers, developers, and chatbot users to build goodwill and encourage product adoption. The company plans to sell access to premium AI services via subscription, similar to OpenAI. Other strategies might include offering custom AI solutions, cloud-based AI processing, and enterprise licensing.

Rise of DeepSeek and market competition

DeepSeek quickly rose to the top of Apple's App Store following its release, potentially outperforming competitors like Microsoft-backed OpenAI’s ChatGPT and Alphabet-owned Gemini in some areas.

The company controversially claims it developed its model using outdated microchips and a training budget of roughly $6 million, while US giants spend billions on model training.

This claim has faced scrutiny, possibly undermining the 'picks and shovels' narrative promoted by Nvidia. Analysts suspect DeepSeek sourced advanced Nvidia graphics processing units (GPUs) via Singapore, bypassing US government bans.

Ethical concerns

China is investing approximately $137 billion over the next five years through its New AI Industry Development Action Plan, competing with the US $500 billion Stargate Project. China might restrict DeepSeek’s growth for sovereign interests.

DeepSeek’s low cost, resource efficiency, and affordable development challenge the idea that building advanced AI requires significant investment.

Data privacy and governance issues

Like many Chinese companies, DeepSeek faces environmental, social, and governance (ESG) concerns. User data is stored on Chinese servers, raising surveillance concerns, similar to those faced by TikTok. The US navy has banned DeepSeek for security concerns. The AI model adheres to Chinese censorship, omitting topics like Tiananmen Square and Xi Jinping, causing fears of propaganda or misinformation.

DeepSeek is accused by OpenAI of ‘copying’ its work, contributing to transparency issues.

DeepSeek-related investments

While you wait for the DeepSeek IPO, there are many AI-focused stocks to consider. Alphabet, owning the Gemini chatbot, is closely related; Microsoft, with its stake in OpenAI, is another option.

Chinese platform stock Alibaba recently launched a competing chatbot, potentially surpassing DeepSeek, making it another choice. Baidu's Ernie Bot is also available.

For diversification, the iShares MSCI China UCITS exchange traded fund (ETF) might interest investors, holding 581 China-focused companies with a 0.28% expense ratio. The Global X Robotics & Artificial Intelligence UCITS ETF, featuring Nvidia as a top holding and a 0.68% expense ratio, offers global exposure to the AI theme.

For investors seeking diversification, the iShares MSCI China UCITS ETF may be worth considering. It owns 581 China-concentrated companies with a total expense ratio of 0.28%. Otherwise, the Global X Robotics & Artificial Intelligence UCITS ETF, which counts Nvidia as its top holding and with a 0.68% expense ratio, may be preferred by investors looking for more global exposure to the theme.