Mercer on AI's 2023 Performance & Expectations for 2024

In a recent special edition video, VettaFi’s CMO Jon Fee sat down with Senior Research Analyst Zeno Mercer to discuss all things artificial intelligence. The duo explores several topics within this technology realm to give investors and advisors a better understanding of AI’s 2023 performance overall.

Mercer on AI’s 2023 Performance & Expectations for 2024

Jon Fee: Zeno Mercer, a senior research analyst here at VettaFi. Thank you for joining me again on screen. I know you’re in Memphis now. You seem to always be on the road out talking to various AI companies. I know you were in Brooklyn doing the same last week. How are you doing?

Zeno Mercer: Doing good. Yeah, it’s good to be back home. And I’ve certainly been on the road. There’s lots of innovation happening all across the globe. So, have to keep staying on top of everything.

Jon Fee: Yeah, innovation seems to be like the keyword around all things AI and Zeno. No pun intended, but I’m thinking about the THNQ Index, also known as VettaFi’s ROBO Global Artificial Intelligence Index (THNQ). Again, the ticker is THNQ. I’ve thinking about AI because although Webster’s Dictionary this year said the word of the year is “authentic,” I thought it was ironic that the acronym of the year is definitely AI.

So closing out 2023, I’ve got questions for you. I know you’re the right guy to talk to about all things AI. Today we’re seeing AI all over the headlines. You know, I recently read that McDonald’s is using AI to make better hamburgers. I’d love to know your thoughts there. I also just read earlier today that UPS is using AI to combat package theft this holiday season.

So what’s your take on better hamburgers or decreasing package theft with AI?

Zeno Mercer: You’re right. The cadence of new AI releases, milestones, and announcements is astounding and only accelerating. This quarter alone, we’ve seen massive announcements. We’ve got, as you said, burgers. It doesn’t just start there. I mean, you’re seeing AI deployed both on the product side, operations side all throughout the enterprise government, and even consumer ecosystems as we’re actually starting to be able to implement this, monitor it, and go from this initial testing phase into a deployment phase.

So we’re getting closer to this point of real-time personal assistants, and autonomous vehicles, and all of these things that have been kind of on people’s minds that follow this space for a long time. But now we’re getting to this point where the infrastructure, the technologies, the regulation, and other elements are coming together. And of course, this looked really different from back in 2018 when we launched the THNQ index.

Jon Fee: Absolutely. I’m a California kid. So does this mean McDonald’s can make a better burger than In-N-Out?

Zeno Mercer: Oh, that’s that’s probably up to consumer preference. But it does mean that we’re going to see improvements across supply chains, across the way that they’re actually producing the burger. I mean, if you think about it, they’re probably reverse-engineering every single step. And the taste and the quality, all of these different elements together to engineer a better burger, just like they’re going to make better cars, better batteries, better everything.

That’s in our life today and it will be AI-driven going forward.

Jon Fee: Love it. OK, so everything’s getting better with AI, and I love the optimism.

Zeno Mercer: I’m an optimist, Jon.

Jon Fee: 100%. Let’s talk about the index. How’s performance been with the THNQ index?

Zeno Mercer: So THNQ is up 21% in the fourth quarter of 2023 after a slight breather of being down 5% in Q3. So it had a stronger year. Today the index is up 58%, which is slightly trailing its 2020 performance of 68% growth. The year is not over, but that was also before AI was popular. A big difference between now and then, though, is that in 2021, we saw Ford sales hit over 10 times and now it’s just now going back to its long-term average of six and a half times.

So the actual revenue and performance are starting to really get into gear. Last time, it was just kind of this overall market bubble that we saw.

Jon Fee: Yeah, from my vantage point, I think another big difference between then and now is ChatGPT. How has ChatGPT, which has certainly dominated headlines this year as well, helped or hurt stocks in the index?

Zeno Mercer: So ChatGPT and overall large language models to a broader extent have created this whirlwind of actual investment by governments and enterprises. Technical leaders and nontechnical leaders like to invest in the infrastructure that will go into not necessarily deployment, but we’re in this massive frenzy of testing phase, which has really boosted Nvidia, at least in this first leg of what we’ll call the AI journey.

And so to those that are not aware, the THNQ index actually adapts as these technological advancements come through. We’re monitoring these changes and we restore companies based on innovation and technical leaps and comparisons. And these changes are actually implemented on a quarterly basis. So you asked how this  is actually implemented. They’re impacting stocks right now. So let’s look at this last earnings season.

Q3 earnings season just wrapped up. Ninety-two percent of THNQ is profitable now. The weighted average EPS grew 54% and sales 11.8%, with 88% beating expectations. Even within that forward outlook, in 2024, and 2025, we saw revised upward guidance revisions. So even then, if you look at the whole ecosystem, a lot of buyers are still trying to figure out what their plan is.

So a lot of these pipelines aren’t even registering the companies. They’re going to be coming on board and really figuring out how they’re going to use AI, deploy AI, and across the different modalities of industries. So really thinking of these numbers is still conservative.

Jon Fee: That’s phenomenal. It sounds like you’re not the only one that’s optimistic about AI. It sounds like a lot of investors are optimistic about investing in AI. Tell me about some of the constituents in the index. Like what are some of your favorite names that you haven’t mentioned so far? Then I’d love to hear about maybe a lesser-known name that’s not getting headlines, but maybe should.

Zeno Mercer:  That’s a good idea. So we have 11 subsectors in THNQ. These range from semiconductors to network security business processes, and actually, nine of the 11 subsectors are up double digits this quarter. So we’re actually seeing growth. It’s not just in Nvidia in tech. Nvidia is actually kind of at the bottom of the pack this quarter. So we’ve got companies outside of Nvidia like Taiwan Semiconductor that actually produce the chips for AI. And one of the reasons why we’re really excited about it and why we include a company like TSMC is because they supply to other players in computer vision and air chips.

Microsoft is even looking at developing its own AI chips. So we could see some pressure as companies try to diversify away from companies like Nvidia as well. Network and security is another subsector within THNQ. We’ve got companies like a restart and pure storage which provide critical infrastructure for scaling these applications on the networking and the storage side, more data, more video data, or interaction.

That’s a lot to deal with and process. So these companies are like a proxy into all these different other companies developing. You also have cybersecurity issues. The more that is augmented and enabled, the more cybersecurity we need to have in place to protect those processes and rails and understand what’s going on. So companies like CrowdStrike are really benefiting and using AI and helping enable the adoption of AI.

Jon Fee: That’s incredible. And it’s awesome to think that 90-plus percent of these constituents now are in a state of profitability. Zeno, I’ve got one more question for you, and I know you got to run, but, what are some 2024 predictions that you have? Give me your top 10 predictions of things that are likely to come in the world of AI and potentially the thinking of what’s next.

Zeno Mercer: I would say maybe a hot take or just a take is that I think Microsoft’s really going to go after Apple and the consumer. They just bought Activision. They’ve got this OpenAI play. You put the two together with their enterprise prowess and players. I don’t think Microsoft wants to lose out against Apple on the next wave of consumer-focused technology products.

And so Apple’s dominated the iPhone. What’s after the iPhone? A mix of wearables, computer vision wearables, and things like that now.  And I believe Microsoft is making a really big play there that people are really looking at overall seeing a bigger uptake in the AI-related technologies and services going in as companies have to prepare themselves for this new paradigm into AI across products, services, and operations.

And then I think two really big issues or things that are going to come out of 2024 are personal AI assistants. I think that’s going to be a thing that really starts to take off. Another thing is the combination of these AI, sometimes even open source AI, which we’re seeing compete even closer with some of the top-tier models such as open OpenAI combined with data equals personal assistant.

And so that’s going to start to see like early MVPs go into consumers’ hands. And lastly, I think that and believe that our research is pointing to the overlap of robotics really going to start to have a measurable impact. Capabilities expansion will lead to value expansion and better ROI, which will increase the rate of adoption and grow the addressable market. So, kind of this perfect storm for this this new wave of adoption into the crossover of AI and robotics.

Jon Fee: That’s incredible. Zeno, you got me thinking even more about just the role of AI. Thank you for making the time. I know I’m going to see you down in Miami at the Exchange Conference where we can talk more about AI strategies, investments, business applications, and personal applications. Have a wonderful end of the year and I’ll see you in in 2024. Thank you, Zeno.

Zeno Mercer: Happy New Year to you. Thanks.

For more news, information, and analysis, visit the Artificial Intelligence Channel.