By Teresa Rivas
DeepSeek rattled the market to start the week after revealing the possibility of cheaper, more efficient artificial intelligence. The new era could be a boon to many retailers — and their stocks.
China's new AI tool sent shock waves through markets after a paper was published that indicated it used far fewer chips, and thus cost less to produce, than other AI models. That was bad news for Nvidia and other stocks tied to the AI trade, and the iShares Semiconductor exchange-traded fund is down 5.2% this week.
What's bad for Nvidia, however, has a high potential of being good news for smaller retail stocks, which had previously been locked out of AI's benefits because of its high price tag. The market, at least this week, appears to agree, with the SPDR S&P Retail ETF on track to finish the week up 1.7%.
"The larger companies have always maintained a competitive advantage because their wallets are bigger," says Frank Mentone, a senior wealth advisor at Focus Partners Wealth. "If a small company can use AI to understand consumer behavior and trends in real time, they can optimize their pricing and potentially customer experience."
The potential is enormous. Cheap AI can lead to more retailers delivering targeted ads, tailored promotions, and other personalized contact with shoppers. That may not sound ideal to some consumers — more nudges to buy random products is the last thing many people want. Yet it could also improve the customer experience: Imagine a retailer chatbot that actually answers questions instead of just delaying your connection to a human agent.
There are plenty of other behind-the-scenes benefits, notes Tim Thomas, chief investment officer at Badgley Phelps. "AI can help retailers become more efficient with logistics, including their supply chain, warehouse efficiency, and transportation optimization, enable retailers to adopt more of an 'omnichannel' inventory model, and help retailers segment customer data better, as well as analyze and predict buying patterns," he writes.
Of course, DeepSeek can only do so much. It won't put every player on par with a company like Walmart, whose deep pockets have allowed it to invest in automation — from fleets of order-fulfilling robots at its distribution centers to drone delivery and a rapidly growing advertising business. Nor will they be on even footing with Amazon.com, with its tech advantage and captive audience. But AI may allow smaller companies to reach their customers more efficiently on Amazon.
"The Amazon marketplace is like the Wild Wild West," says Mentone, and increased access to AI can allow more players to "jockey for position."
Larger retailers, too, are already benefiting from AI — and in ways that seem both obvious and clever. Lowe's, for instance, said it would use AI to remind users about necessary repairs and maintenance, and recommend replacement products for home appliances. CVS Health recently said that it began testing an app that will let customers unlock those super-annoying secured display cabinets. These are the kind of small steps that could have big impacts on future profits. It may be a coincidence that CVS, one of the S&P 500's worst-performing stocks in 2024, has gained more than 25% in January — but maybe not.
Best Buy could also be poised to benefit. The stock has dropped 11% to a recent $86.78 since gapping up after reporting earnings in August. But as Apple's earnings showed, there may be more demand for new products driven by AI, something that could benefit the electronics company. Best Buy stock, too, looks like it could be ready to bounce back from that decline, perhaps as high as $106, if it can turn recent support into a move higher, writes ChartSmarter's technical analyst Douglas Busch. "Mass retailers win share during commoditization/weaker backdrops while specialty wins when innovation is strong and category engagement is high, " he explains. "The daily chart...has a nice technical look to it."
And maybe a little AI to fuel it.
Write to Teresa Rivas at teresa.rivas@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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