By Christopher Gannatti, CFA; Blake Heimann
Technology trends are not linear – they are exponential.
Exponential growth makes the path of adoption difficult to predict. A big topic like artificial intelligence – and predicting exactly how “big” the opportunity is – is a daunting task.
Take the recent ChatGPT phenomenon. This application is not only popular – it is one of the fastest applications ever to reach 100 million downloads. As a society, we still define what ChatGPT actually is, but its virality is already off the charts.
The AI investment market reacted forcefully in early 2023.
WisdomTree designed the WisdomTree Artificial Intelligence and Innovation Fund (WTAI) to provide investors with an opportunity to gain exposure to the entire AI ecosystem. WTAI has started 2023 with a bang after a very difficult performance period in 2022.
Figure 1: The WTAI showed a dramatic outperformance of the Nasdaq 100 Index in early 2023
Performance data for recent month-end dates is available here.
Where is ChatGPT’s impact in the AI ecosystem?
ChatGPT gained attention in late November/early December 2022. WTAI is exposed to the entire ecosystem and not just semiconductors or software. Below we detail what drove the switch from the downtrend in 2022 to a more positive performance in 2023.
August, September and October 2022 were tough months. November 2022 showed a clear change, namely in semiconductors (semiconductors); Semi-finals within the WTAI showed varying performances. December 2022 was another challenging month in terms of performance, but then January 2023 started with a bang. All four of our different sub-sectors were in positive territory. That hadn’t happened in a while. February 2023 was clearly more difficult — particularly towards the end of the month — but we can see that both AI software and semiconductors were still positive.
Figure 2: How the AI ecosystem reacted to the ChatGPT euphoria
Conclusion: Figure 2 shows that AI is an ecosystem – not just software, not just a few companies. There are established players and newcomers. There are some of the largest companies in the world and there are small caps.
At WTAI, we aim to capitalize on the increasing adoption of AI in the coming decades.
Integration of generative AI and chat bots
The year 2022 was a demarcation in the initial public offering (IPO) market. After a very strong 2021, with many companies venturing from the private to the public markets, 2022 was almost at a standstill with little activity.
So, on March 1, 2023, the following headline tells us two things:
Instacart, a widely recognized name in the delivery space, is preparing to go public. Instacart is interested in tapping into the frenzy of interest currently surrounding ChatGPT.
Instacart Joins ChatGPT Frenzy and Adds Chatbot to Grocery Shopping App1
Far from being the only example, a recent scan of news articles reveals:
Microsoft brings ChatGPT-powered Bing to mobile devices2 Facebook parent, Snap Embrace AI technology powering ChatGPT chatbot3
Companies rely on this technology. In the first two months, ChatGPT generated 100 million users, and towards the end of February 2023, the tool was seeing around 35 million visits per day – a number similar to that of the Bing.4 search engine
Jump on the moving train
There was a time when we saw various CEOs mention AI in their quarterly earnings calls. When an organization is associated with data, they want to use the most modern tools to uncover insights.
Data was practically “the new oil” – a common phrase.
Figure 3 shows that mentions of “Generative AI” and “ChatGPT” skyrocketed in February 2023.
Figure 3: Earnings, events and documents mentioning “Generative AI” or “ChatGPT”.
Complete AI value chain
WisdomTree’s work in AI focuses on the entire AI value chain.
Software, Hardware: Some companies build algorithms directly, while others build sensors and computing power and other hardware that facilitate the functionality of AI.
Innovative Applications: Other companies are making extensive use of AI to improve services. We often think of Netflix’s content platform for 200 million users, giving clear recommendations on what to watch next… that can’t be done well with anything other than AI.
WisdomTree sees application software and semiconductors as the two most AI-centric subsectors. These are the generators of algorithms and computing power. These sub-sectors were particularly active at mention of Generative AI or ChatGPT.
Figure 4: Mentions of Generative AI or ChatGPT by GICS sub-industry
The macroeconomic environment is currently dominating market activity. However, investors clearly remain intrigued by the secular growth story of AI that has put ChatGPT in the spotlight. Thematic investing is all about stories, and ChatGPT’s story has been a massive performance catalyst so far.
1 Source: Angus Loten, “Instacart Joins ChatGPT Frenzy, Adding Chatbot To Grocery Shopping App”, Wall Street Journal, 184.108.40.206 Source: Sarah E. Needleman, “Microsoft Brings ChatGPT-powered Bing to Apple, Android Mobile Devices,” Wall Street Journal 02/22/23/3 Source: Meghan Bobrowsky, “Facebook Parent, Snap Embrace AI Technology That Powers ChatGPT Chatbot”, Wall Street Journal 02/27/23/4 Source: Laura Forman, “AI Has Its ‘iPhone Moment,'” Wall Street Journal, 3/2/23.
Important risks associated with this article
On March 9, 2023, WTAI owned 0%, 1.02%, and 0% of Instacart, Microsoft, and Facebook, respectively. Click here for a full list of fund holdings. Stock changes reserved.
There are risks associated with investing, including the possible loss of capital. The fund invests in companies primarily active in the artificial intelligence (AI) and innovation investment theme. Companies looking at AI typically face intense competition and potentially rapid product obsolescence. These businesses are also heavily dependent on intellectual property rights and may be adversely affected by the loss or impairment of those rights. In addition, AI companies typically invest significant sums in research and development, and there are no guarantees that the products or services produced by these companies will be successful. Companies that capitalize on innovation and develop technologies to displace older technologies or create new markets may not be successful. The Fund invests in securities that are included in or representative of its index, regardless of their investment value, and the Fund does not attempt to outperform its index or take defensive positions in falling markets. The composition of the Index is governed by an Index Committee and the Index may not perform as intended. Please refer to the fund’s prospectus for specific details on the fund’s risk profile.
Christopher Gannatti joined WisdomTree in December 2010 as a Research Analyst, working directly with Jeremy Schwartz, CFA®, Director of Research. In January 2014, he was promoted to Associate Director of Research, where he was responsible for leading various groups of analysts and strategists within WisdomTree’s broader research team. In February 2018, Christopher was promoted to Head of Research Europe, where he will be responsible for all of WisdomTree’s research efforts in the European market, based out of WisdomTree’s London office, as well as providing global support for the UCITs platform. Christopher joined WisdomTree from Lord Abbett, where he served as a regional consultant for four and a half years. He received his MBA in Quantitative Finance, Accounting and Economics from NYU’s Stern School of Business in 2010 and his bachelor’s degree in economics from Colgate University in 2006. Christopher holds the Chartered Financial Analyst designation.
Editor’s Note: The summary bullet points for this article were selected by the editors of Seeking Alpha.