The investment landscape is continuously shifting, and for shareholders in SoftBank Group, expectations have soared high with the resurgence of the artificial intelligence (AI) hype. However, a rising challenge has emerged in the form of DeepSeek, a low-cost AI model from a Chinese startup that stands to considerably disrupt the market dynamics and alter the trajectory of SoftBank's ambitious plans.

In a bold move to cement its position at the forefront of AI development, SoftBank is reportedly raising $500 billion for a project dubbed “Star Gate.” This initiative aims to establish a robust AI infrastructure in the United States and is central to founder Masayoshi Son's goal of leading in this emerging field. Yet, the very existence of DeepSeek's cost-effective AI solutions is sparking skepticism about the necessity of such a massive outlay.

Jung In Yun, the CEO of Fibonacci Asset Management Global Pte, suggests that DeepSeek could catalyze a “short-term market correction” for not just SoftBank but for other AI stocks as well. While he maintains a long-term optimistic outlook for AI, he underscores that profitability will take years to achieve. "It’s going to take time," he cautions, emphasizing that immediate returns might not align with the prolonged investment timelines often associated with technological innovations.

The financial repercussions are already apparent, as SoftBank recorded losses in its most recent quarter, driven by reduced profit expectations. Analysts have projected a drop of approximately 25% in expected earnings since the stock peaked in late November. Supporting this bearish sentiment, S&P Global has noted an increase in short-selling positions, with about 3.8% of SoftBank’s float being shorted—nearly reaching levels not seen in the past 22 months.

Last month, interest in SoftBank’s stock surged when Son unveiled the “Star Gate” initiative alongside the U.S. President, showcasing a constellation of partnerships with renowned technology companies like OpenAI. However, this jubilation was short-lived as DeepSeek entered the fray with a disruptive AI model that sent SoftBank’s stock into a tailspin shortly thereafter.

As Kazuhiro Sasaki, the head of research at Phillip Securities Japan Ltd, aptly points out, while the “Star Gate” project promises opportunities, it also carries substantial risks. The emergence of DeepSeek calls into question the actual need for extensive data center capabilities, a cornerstone of SoftBank’s investment strategy. With hefty investments come significant liabilities, and the interest on such debts should not be underestimated.

Further complicating matters, Jefferies analyst Atul Goyal noted in a report that the financing obligations tied to “Star Gate” might restrict SoftBank’s ability to engage in stock buybacks, a maneuver that has historically bolstered its stock price. This is particularly concerning at a time when maintaining shareholder confidence is of utmost importance.

Despite the prevailing skepticism, sell-side analysts retain a generally positive outlook on SoftBank, projecting an average target price that anticipates a rise of around 30% over the coming year. Observers have pointed to SoftBank’s significant stake in AI powerhouse Arm Holdings Plc as a notable strength, a position that plays to the company's advantage in the current landscape.

Investment fund manager Masakazu Takeda of Sparx Asia Investment Advisors Ltd highlights that investing in SoftBank is akin to effectively acquiring Arm at a considerable discount. The stock of Arm is not only highly sought after but is also challenging to procure due to a limited free float, making SoftBank’s position increasingly valuable.

The buzz around Arm and the AI initiatives spearheaded by Son had previously driven SoftBank's stock to an all-time high in July. However, that enthusiasm was dampened by a subsequent sell-off in the tech sector, as concerns over valuations took center stage. Today, although the stock remains down approximately 20% from its peak, the potential for recovery hinges on the ability to leverage AI for profitability.

Should market expectations regarding the AI boom shift significantly, the Vision Fund's projects in the AI arena might find themselves faced with diminished valuations or hurdles in exiting investments, ultimately hampering SoftBank's overall investment returns and stock price performance. As the rapid pace of technological advancement continues, investors and analysts alike remain vigilant, watching how this evolving narrative unfolds in the face of ongoing challenges in the AI landscape.