An illustration displaying the Deepseek app icon / Reuters-Yonhap

Naver and Kakao are seeing unexpected benefits from the rise of Chinese artificial intelligence (AI) startup DeepSeek as its low-cost, open-source development has raised expectations that Korean latecomers could catch up in the highly competitive AI market, analysts said Monday.

"The DeepSeek incident has shifted the narrative from the dominance of AI hardware companies to improved profitability for software firms due to declining AI costs," Kiwoom Securities analyst Han Ji-young said.

DeepSeek's latest AI inference model, R1, recently made a surprise market debut by delivering a notable performance despite its low training costs and use of lower-grade chips. While many aspects remain to be verified, the success of the model and the fact that it's open-source are evaluated to create opportunities for latecomers like Naver and Kakao.

Such expectations have already been reflected in their stock prices. On Friday, Korea's first trading day since DeepSeek's announcement and the Lunar New Year holiday, Naver and Kakao's stock prices jumped 6.13 percent and 7.27 percent, respectively.

The rally continued on Monday, with Kakao reaching 41,800 won ($28.5), increasing by 9 percent. Naver increased slightly by 0.23 percent and ended at 217,000 won, managing to hold up despite U.S. President Donald Trump's tariff measures having chilled the overall domestic stock market.

Their gains stand in stark contrast to the struggles of domestic semiconductor giants. Since Jan. 31, the stock prices of Samsung Electronics and SK hynix have declined by 5.03 percent and 13.62 percent, respectively, amid concerns that demand for high-cost chips from Nvidia could weaken. Both companies are major chip providers to the U.S. AI chipmaker.

"The growing strength of open-source technology could help bridge the gap with big tech," Sangsangin Investment & Securities analyst Choi Seung-ho said. "If DeepSeek's low-cost methodology is effectively adopted, it could revitalize AI development in Korea, which has been struggling due to insufficient infrastructure investment."

Naver and Kakao have already made advancements in AI, even developing large language models capable of processing human languages. However, their performance has lagged behind global leaders, facing challenges in making the large-scale investments required to adopt high-performance computing resources.

Analysts say that Naver and Kakao could see a rebound, using DeepSeek's market shakeup as a catalyst. Both stocks have long been burdened by sluggish performance.

Korea Investment & Securities has raised its target price for Naver by 8.3 percent, from 240,000 won to 260,000 won, and for Kakao by 8.9 percent, from 46,000 won to 49,000 won.

"The emergence of DeepSeek marks a new turning point in the AI industry, signaling the potential for either entering a new growth phase or accelerating the transition to maturity," Daishin Securities analyst Lee Kyoung-min said. "As the industry matures, long-term growth prospects strengthen, with demand expected to rise alongside the expanding adoption of AI."