Don’t get fooled by the report and media
Yesterday, DeepSeek released a report stating that they might be making a 545% profit margin daily (theoretical) on their AI services. Since then, the entire media house has been on fire, and you would be finding articles about how DeepSeek is making such a huge profit with such a low price.
https://medium.com/media/7b4deac5c5fc22c0568454bd61235f5a/href
Subscribe to datasciencepocket on Gumroad
But a closer look reveals that this figure is purely theoretical and does not accurately reflect the company’s actual profitability.
The claim is based on idealized calculations that do not account for real-world constraints, such as service monetization limits, operational expenses, and market competition.
While impressive on paper, the true financial picture is far more nuanced.
Theoretical vs. Actual Profit Margin
What is Theoretical Calculation?
A theoretical calculation is an estimate based on simplified assumptions, often ignoring practical limitations such as hidden costs, market behavior, and operational constraints. It presents a best-case scenario rather than a realistic one.
For example, let’s say a bakery estimates its profit margin as follows:
Revenue per day: $1,000 (assuming all pastries sell at full price)
Cost of ingredients and rent: $200
Profit margin calculation: ($1,000 — $200) / $800 = 400%
However, in reality:
Some pastries go unsold or are discounted.
There are additional labor, electricity, and equipment maintenance costs.
Unexpected expenses arise, such as repairs or ingredient price fluctuations.
As a result, the actual profit margin might be only 100% or lower, much less than the theoretical estimate.
Theoretical vs. Actual Profit Margin
Theoretical Calculation
DeepSeek arrived at the 545% figure based on a simple assumption: all usage of its V3 and R1 models within a 24-hour period was billed at R1 pricing. Under these idealized conditions:
Theoretical daily revenue: $562,027
GPU leasing cost: $87,072
Profit margin calculation: ($562,027 — $87,072) / $87,072 = 545%
However, this assumption overlooks key real-world variables that drastically alter the financial picture.
Actual Revenue Considerations
DeepSeek itself has clarified that its actual revenue is significantly lower due to:
Limited Monetization: Only a fraction of its services are monetized.
Free Access: Web and app access remain free for users, reducing direct revenue.
Discounts: The company offers lower prices during off-peak hours, further reducing earnings.
Additional Factors Affecting Profitability
1. Monetization Limitations
DeepSeek prioritizes accessibility and long-term adoption over short-term profits. By offering free and discounted services, the company ensures widespread usage but at the cost of lower revenue. While the theoretical profit margin is high, it assumes full monetization, which is not the case.
2. Hidden Costs Not Accounted For
The theoretical profit margin calculation does not factor in several major expenses:
- Research and Development (R&D): Developing state-of-the-art AI models is costly. The actual development cost of DeepSeek’s V3 model is estimated between $500 million and $1.6 billion, far exceeding the initially claimed $6 million.
- Infrastructure & Talent: High salaries for AI engineers, software tools, and continuous model improvement contribute significantly to operational costs.
- Data Acquisition & Processing: Training AI models requires massive datasets, which involve licensing, cleaning, and storage costs.
3. Market and Usage Dynamics
If DeepSeek were to fully monetize its services (charging for web/app access, eliminating discounts), usage would likely drop significantly. A high theoretical profit margin assumes constant demand, but in reality, customers might seek alternatives or reduce usage when faced with higher costs.
4. Hardware and Operational Costs
Running AI models isn’t just about leasing GPUs — it involves massive infrastructure investments:
- GPU Fleet: DeepSeek operates an estimated 50,000 Nvidia Hopper GPUs, requiring an initial investment of $1.6 billion.
- Operating Costs: Annual operating expenses, including server maintenance and power consumption, are estimated at $944 million.
- Cloud & Networking Costs: Data transfer, storage, and backend services further add to the cost structure.
5. Competition and Market Conditions
The AI landscape is highly competitive, with companies like OpenAI, Google DeepMind, and Anthropic vying for market share. Competitive pricing strategies limit how much DeepSeek can charge, reducing actual profit margins. Additionally, customer expectations around AI pricing and free-tier access force companies to balance growth with profitability.
Estimating DeepSeek’s Actual Profit Margin
While the 545% figure is an eye-catching claim, a more realistic estimate of DeepSeek’s actual profit margin would be significantly lower. Taking into account:
Reduced actual revenue due to free services and discounts
High operational and R&D costs
Competitive pricing limitations
A reasonable estimate would place DeepSeek’s actual profit margin between 20–50%. If only GPU leasing costs were considered, margins could still be relatively high, around 100–200%. However, when factoring in full operational expenses — including infrastructure, salaries, and long-term investments — the margin would shrink considerably.
Final Verdict: The Reality of DeepSeek’s Profitability
While a 545% profit margin looks impressive on paper, it’s clear that this number is a best-case scenario based on unrealistic assumptions. DeepSeek’s actual profitability is impacted by:
- Partial monetization and free access policies.
- High R&D and operational costs.
- Market-driven pricing pressures and competition.
- Infrastructure and GPU-related expenses.
In reality, DeepSeek AI is likely far less profitable than its theoretical projections suggest. While the company may have a promising future, the claim of a 545% margin is more of a marketing exaggeration than a financial reality.
Why DeepSeek AI’s Profit Margin is Not 545% as Claimed was originally published in Data Science in your pocket on Medium, where people are continuing the conversation by highlighting and responding to this story.
