Disruptive Tech Theme of the Week: Zeno Mercer on AI & Robotics

This is an exciting time for artificial intelligence and robotics stocks, with many companies reporting and some major news announcements. This week, for the Disruptive Theme of the Week, I reached out to VettaFi’s Senior Research Analyst, Zeno Mercer, for an update on the latest developments in AI and robotics.

Disruptive Tech Theme of the Week Zeno Mercer Talks AI & Robotics

Zeno Mercer, Senior Research Analyst for VettaFi

Jane: Zeno, I just read that Elon Musk revealed his own artificial intelligence bot to challenge ChatGPT, claiming, of course, that his product, dubbed “Grok,” is superior. What do you make of this news in terms of its impact? Will “Grok” become a formidable challenger rivaling ChatGPT, Bard, and others?

Zeno: I am admittedly still waiting to get off the waitlist… but his demo so far has been underwhelming. This isn’t to say that Elon and X can’t do something based on the corpus of X/Twitter and build it into a useful tool (as he flushes out his super-app ambitions).

Jane:  In terms of the winners of the AI race, which companies are at the forefront of AI technology? And which ones are you most excited about for the future?

Zeno:  Obviously, OpenAI is pushing boundaries of what is publicly available to the developer ecosystem and the public. Hence, the billions poured into it, which will continue to be poured into it. We also have other contenders that are getting backing from the likes of Alphabet and Amazon, such as Anthropic. It’s pretty telling that these large public companies are putting so much money into these private ventures. From a forward-looking standpoint – and this separates this latest technological advance from the past 15 years – it’s unclear who the winner will be at this point.

Does Alphabet get de-platformed? Or do they pivot into new business models (using what is considered one of the largest data sets on earth)? Can META convert its open-source technology into more revenue streams? Or do we simply see new social networking platforms with better user alignment come into the fold? Does Microsoft’s success lead to its downfall through fewer licenses needed for operations?

There is new opportunity and effectively a race to become the user experience (UX) or operating system (OS) of the future (hence: super-app) that will effectively wipe out many single-use applications that have data silos (less helpful and biased towards their own use cases). We now have the capability to source data from everywhere in a methodology and format that makes sense for the user.

From a near-term perspective, we’re already seeing demos of computer vision working with generative AI for scene awareness, analysis, and recommendations. How far are we from real-time AI assistance and heads-up displays (HUDs)? Right now, we are dealing with high-cost and bad form factors. But in the future, there will be sleek and affordable technology as soon as two years from now.

Keeping this in mind, we actually have strong convictions in ecosystem infrastructure players that contribute to AI development, ongoing monitoring and analysis, and connectivity/cybersecurity. It ultimately doesn’t matter as much which proverbial horse “wins the race” or if open-source alternatives take off. All the regulation discussions globally also point to monitoring and explainability as an important aspect. It’s definitely a space to watch.

A Pivotal Moment for Robotics

Jane:  Wow! That is truly fascinating! Let’s pivot a bit and talk about robotics. First off, congratulations on ringing the opening bell at the NYSE in celebration of the ROBO ETF’s 10th anniversary!  AI is going to be transformative, giving robots the ability to learn and think on their own.  It is the stuff of science fiction. Can you talk a little bit about the impact that AI will have on robotic technology and applications?

Zeno: We are truly at a pivotal moment for the robotics space, which has actually underperformed in the broader technology market this year as we’ve seen the impact from slower-than-expected China rebound and delays from large projects due to strikes (and subsequent downstream component utilization pull-through). Sentiment from our research is pointing towards not only a cyclical positive direction in China in 2024, but we also start to see the real tailwinds of the CHIPS Act, the energy transition (which requires LOTS of robotics to power creation and ongoing maintenance), and infrastructure build-outs.

Now, let’s get back to the impact of AI on robotics. We’re clearly starting to see the potential as we watch, nearly weekly now, the cadence of demonstrations and cross-domain collaboration accelerate the training and capabilities of robotics. Consider NVIDIA’s Eureka and Deepmind and Google’s collaboration, called RT-X, working on standardizing tasks and making general-purpose robots easier to design and use. As skill expansion grows and capabilities increase, we see higher value from robots in general, which should also be safer in more environments

Our hypothesis is that this convergence of factors will lead to an incredible and clearly underestimated growth spurt of robotics implementation across the globe. There will clearly still be the need for control and safeguards at the individual and macro level, including system integrators like Siemens and Rockwell Automation.While generative AI technology is just one facet of AI, it has clearly resonated with not only the general public through its ability to rapidly understand, reason, and synthesize text but increasingly, we are seeing multi-modal capabilities.

Tracking ROBO Indexes

Jane: ROBO Global has three VettaFi indexes tracked by ETFs in the marketplace. Can you tell us a little about the different focus of each?

Zeno: Absolutely, Jane! It’s great to delve into the distinct focuses of the ROBO Global Indexes. The idea is simple:  Atoms and Bits. The journey started with the ROBO Global Robotics and Automation Index in 2013, which underlies the ROBO Global Robotics & Automation Index ETF (ROBO). It was the world’s first index to classify and track the world’s best-in-class and most important subsectors of the robotics industry.

This pioneering index capitalizes on the advances in robotics and automation, emphasizing physical creation and movement in various sectors, from manufacturing to logistics, agriculture, healthcare, and beyond. It’s about harnessing the power of ‘atoms’ – the tangible, physical elements of technology that reshape industries and precision controls. It also includes software technologies that help understand, interact, and automate real-world processes.

Then, five years later, in 2018, the introduction of the ROBO Global Artificial Intelligence Index. It underlies the ROBO Global Artificial Intelligence ETF (THNQ). This index represents a leap into the realm of ‘bits,’ focusing on digital domain solutions. It captures companies at the forefront of artificial intelligence, from data processing to machine learning. This domain is about reverse-engineering true knowledge and applying it in ways that redefine problem-solving in the digital sphere, with increasing cross-over and synergy into Robotics. In fact, we believe that advances in AI will lead to a massive boost in robotics capabilities and subsequent adoption, and we’ll start to see that coming true mid-2024 and beyond.

Lastly, the ROBO Global Healthcare Technology & Innovation Index, which is the basis for the ROBO Global Healthcare Technology and Innovation ETF (HTEC), was launched shortly after THNQ’s index in 2019. It concentrates on the healthcare sector. This index is unique in its focus on companies driving innovation in healthcare technology – from revolutionary medical devices to cutting-edge biotech. While intersecting with robotics and AI in some respects, it’s a domain that maintains its distinct value chain and faces unique challenges and opportunities in improving healthcare outcomes.

Jane:  And for readers comparing these products to others in the marketplace, what would you say are the competitive differences and advantages of these product approaches?

Zeno: When comparing the ROBO Global indexes to other products in the market, a key differentiator lies in our approach to diversification, our unique scoring system, and our access to world-leading advisors who are experts and practitioners in robotics and AI. This includes five Ph. D.s and three Engelberger Robotics Award recipients (the “Nobel Prize of robotics”).

Across the strategies, you will see less concentration in the top 10 names and more exposure to the broader ecosystem. There’s always a long-term conviction as companies come into the strategies tied to longer-term trends and direction of where the “puck is heading.” There are multiple waves of cyclicality and cycle-breaking events happening concurrently that we are monitoring closely. So whether it’s market leadership, technical leadership, or investment and growth opportunities, we consider these important factors when constructing our proprietary subsector classifications.

Disruptive Healthcare Check

Jane: There’s a disruption taking place in healthcare. I just wrote an article a few weeks ago on the rise of diet drugs. Can you talk briefly about how this impacts names in HTEC’s index portfolio?

Zeno: We’ve seen quite a few solid leaders experience quite the sell-off that has extended beyond the immediate scope of GLP-1 inhibitors. We’re absolutely for a healthier world and preventive medicine. However, many conditions and circumstances still occur beyond obesity as the core input. We’ve seen some incredible weight loss journeys begin with GLP-1. Still, it’s unclear whether it ends there, as does its long-term scope. It has been promising so far.

We had already seen a massive sell-off overall before GLP-1 really started to impact valuations in the second half of 2023. That includes -40% declines in companies like Insulet and Dexcom. We’ve also seen a decline in surgical and cardiovascular companies as well. There has been research on lowered cardiovascular risks due to GLP-1.

From our stance, it’s inconclusive that these issues will be eliminated. Many healthy people get cardiovascular, surgical (broad scope), and knee/hip replacements due to aging (and if we extend lifespan due to less obesity, eventually, people will need more interventions — it’s not just from increasing pickleball injury rates).

Overall, HTEC is trading at 3.5X forward EV/sales, which is below the trough of Covid-19 March 2020 FUD, and we’ve seen lots of outflows in healthcare this year. Clearly, investors are jaded, but this does open the door for more attractive entry points. It’s been a slower year, coming off a post-covid transitionary period. Accordingly, revenue is projected to climb 8% in 2024 and over 10.6% in 2025 (FactSet consensus, weighted average) across the portfolio.

Jane: I just watched a cool video on YouTube with a robot hand spinning a pen. How far away are we from “humanoid robots”?

Zeno: The evolution of humanoid robots is quickly unfolding, as we’ve witnessed with Boston Dynamics — now part of Hyundai, which many don’t realize — over the past decade. Now, humanoid factories are being built to mass produce humanoid bots for use in warehouse and manufacturing automation. That includes those from Agility Robots, which are now seeing beta testing by Amazon.

China just released a blueprint for goals for 2025 to establish a foundational robot innovation system and mass production. By 2027, they expect significant improvement in humanoid capabilities to greatly enhance productivity across various sectors. They also believe humanoid robots alone will be a more than $120B market by 2030 (it’s currently closer to $0). You can read more about it here.

The Future of Robots?

Jane: Will we all be replaced in the future by AI and Robots?  What about the job outlook and displacement thesis? Putting it bluntly, are we overestimating the disruptive capability of these technologies? How much of this is “hype”?

Zeno: There has been a lot of coverage and research on job displacement. Not job opportunities, however, but in the outlook for AI. On one hand, we are facing a massive job shortage and labor market mismatch in manufacturing, healthcare, and education. On the other hand, we’re looking at many jobs becoming redundant as AI effectively automates many roles away. But what if we framed this question from another perspective statement? Imagine a world with more life administration, such as household chores, being automatically taken care. And this is not just the upper class but at a more democratized level around the globe.

Transportation costs are 70% lower (at least). Food security is no issue. Health has been elevated globally. The “quality of life index” is propelled to over 80 “healthy” years. Energy is not only abundant but effectively free. Education or personal coaching is effectively a utility across any skill set or activity, in real-time, anywhere. Everyone can be a creator. Kids can collaborate nearly autonomously to build anything they want (within bounds) using generative AI and 3D printing.

I think it’s a question of how we will come to use and integrate with AI and Robotics. We, of course, may see factions emerge that look to minimize or evade technology. Still, it’s hard to ignore the monumental benefits that will support physiological needs.

Jane: To be honest, I thought we would be flying around in spaceships by now, a la the Jetsons. How quickly is this technology going to advance?  What will the future look like in five years, 10 years, 20 years? And what are the biggest risks of AI and robotic technology?

Zeno: Airplanes are an old technology. Helicopters have been around for ages. We’re starting to see EVTOLs (electric vertical takeoffs) on the horizon. This includes Joby Aviation and Archer Aviation, which just gave demos in New York City — not quite spaceships.

Regarding risks, we’re seeing multiple factions emerge (there I am, using that term again) about how best to support artificial intelligence’s safe development and implementation. The U.S., EU, and China have all put forward concepts around how AI impacts the individual and macro levels. Obviously, the use of AI in the military being used to target and kill is severely frowned upon by most. Yet, if we flipped the situation, perhaps a non-lethal drone capable of disarming a rogue or the tactical use of AI and robotics/drones could prove invaluable. It could save lives and bring life-saving medical care to people without endangering more lives. There really are two sides to every coin here.

Jane: Zeno, I could “geek” about these topics all day! Thank you for hanging out with me today!

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