During 2Q 2024, the ROBO Global Artificial Intelligence Index (THNQ) saw a + 2.6% return, roughly in-line with the VettaFi Full World Index (VFWI) return of + 2.87%, with 6 of the 11 subsectors in the positive, led by performances in the Semiconductor (+ 16%), Network & Security (+ 12.6%), Consumer (+ 13.7%), and Cloud Providers (+ 5.2%) subsectors. Offsetting performance came from declines in Big Data / Analytics (- 1.61%), E-commerce (- 5.92%), Business Process (-7.16%) and Healthcare (-31.61%) subsectors.
The AI race is intensifying, with even market leaders at risk if they fail to adapt. AI technology is progressing rapidly. For example, we now have “text-to-app” capabilities emerging which utilize LLM’s for contextual understanding, coding and debugging. In the LLM space, THNQ member Microsoft-backed OpenAI faces stiff competition from THNQ index members like Alibaba (QWEN2) and Alphabet (Gemma 2), which are topping leaderboards. Speaking of Alphabet, their Waymo One autonomous ride hailing launched in San Francisco to the public – heralding the start to an era where autonomous vehicles more resemble an extension of “public transit”. While megacaps dominated Q2 2024, their valuations largely reflect future “AI potential” and discounts competitive and regulatory dynamics.
Of course, AI extends beyond any single company, as reflected in the THNQ index’s diverse composition. Emerging “human-first” regulations are reshaping AI implementation across industries, contributing to a market tipping point where the THNQ index may offer a more balanced approach to AI exposure compared to individual tech giants facing increasing technical and regulatory risks.
While NVIDIA (+ 36.7%) has remained the “spice of AI”, referencing Frank Hurbert’s Dune, the key differences are that unlike the spice in Dune, NVIDIA is dependent on a web of underlying technologies and enablers in the Semiconductor subsector like Lam Research (+ 9.7%), ASML (+ 5.6%), Taiwan Semiconductor (+ 22.7%), and Analog Devices (+ 15.7%), and that the largest buyers (hyperscalers) were not able to create their own and there was no competitive substitutes like Qualcomm (+ 18.0%) or Global Unichip (+ 30.3%).
Meanwhile, high expectations led to some declines among companies that had overall solid earnings numbers and forecasts. The THNQ Index saw 92% of companies beat EPS estimates with an average surprise of +17.65% and 66.5% Y/Y weighted average growth (WAG), while 85.8% beat Sales estimates with an average surprise of + 1.56% and 12.82% WAG. Importantly, 2024 and 2025 revisions have been guided upwards overall on a WAG basis. (Factset & Vettafi Data, as of June 28, 2024)
Network and Security, a core subsector of AI that we believe is even still an underappreciated long-term winner of AI, saw Darktrace (+ 32.09%) acquired by private equity fund Thoma Bravo for around $5 Billion USD. Meanwhile, Pure Storage (+ 23.50%) and Arista Networks (+ 20.86%) continue to climb together as enablers of AI storage and data center networking. Cybersecurity leaders Crowdstrike (+ 19.5%) and Palo Alto Networks (+ 19.3%) continue to show value in protecting the increasingly digitally automated and reliant landscape with new AI offerings. On the other hand, the market questioned Snowflake’s (- 16.4%) future as their revenue growth slowed slightly and their forward guidance was conservative, but we believe their technology and market positioning remain solid as AI takes off and their product release cadence, as well as end-market demand, skyrockets.
The Business Process subsector saw some pre-summer cooling off, as we saw some pressure on both B2B and B2C fronts with Salesforce (- 14.6%), Samsara ( – 10.8%) and Nice Ltd (- 36.8%; removed from Index at Rebalance) in the red while Fair Isaac Corporation (+ 19.1%) and Adobe (+ 10.1%) saw gains. Ultimately – we are seeing strong product updates and innovation across all these companies and maintain conviction in these companies continuing to gain share in key industries and processes across the globe. Costar (- 23.5%), a leading provider of online real estate marketplaces, information and analytics, acquired Matterport, a 3D visualization technology company that has captured over 38 billion square feet of property data globally, for $1.6 billion enterprise value, further cementing Costars dominance in digital real estate technology.
Our approach continues to be monitoring the Artificial Intelligence landscape and finding underlying technologies that enable the “body of artificial intelligence” to exist and thrive in the real world. Our latest rebalance saw three additions: CyberArk, specializing in zero-trust identity management for machines, applications, and IoT – crucial in an AI-driven world of complex machine interactions; Elastic N.V., joining for its real-time search and observability capabilities, addressing the growing need for sophisticated data processing in AI systems; and Nutanix Inc., offering seamless AI application deployment across hybrid multicloud environments. These companies represent further enabling technologies that allow AI to thrive in real-world applications.
VettaFi LLC (“VettaFi”) is the index provider for THNQ, for which it receives an index licensing fee. However, THNQ is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of THNQ.
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