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Opto Sessions

Global X’s Pedro Palandrani on investing across the AI value chain

Pedro Palandrani, Director of Research at Global X ETFs, talks to Opto Sessions about artificial intelligence (AI) and two funds capitalising on this major paradigm shift. He dives into the AI value chain, the chipmakers and hardware makers integral to the sector, and how generative AI and large language models (LLMs) are continuing to evolve.

LISTEN TO THE INTERVIEW:

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Pedro Palandrani is Vice President and Director of Research at Global X ETFs and an expert in the growing field of AI investment.

In his current role, he works across Global X’s suite of ETFs, which cover the investing themes of disruptive technology (and its sub-themes such as AI and blockchain), people and demographics (including ageing, ecommerce and education) and physical environment (such as water, clean tech and renewable energy). Within the first super-theme are Global X’s passively managed Artificial Intelligence & Technology ETF [AIQ] and the Robotics & Artificial Intelligence ETF [BOTZ].

Palandrani joined Global X in 2019 as a research analyst, working across the firm’s thematic growth ETFs, including those under the umbrellas of infrastructure, people and technology.

Previous to that, he worked as an equity research analyst at Cabot Wealth Management, where he gained experience in growth-oriented investment strategies and used ETFs to build multi-asset class fund portfolios. He originally studied in Venezuela before earning an MBA from the Bertolon School of Business at Salem State University, Massachusetts and is currently based in New York.

AI will impact every company

In the past year, AI has moved from a niche interest to a global concern in the blink of an eye, thanks to the rapid adoption of generative AI technology.

Palandrani told Opto Sessions he believes the fast-evolving technology is positioned to transform every company in the world. “I would say that by the end of the decade, there are going to be two types of companies: companies that are using AI — embedding AI into services and operations — and companies that don’t exist anymore.”

For generative AI and LLMs, the market value will likely be in the trillions of dollars. “But any number on this, I don't think is going to be even close to what the true impact of generative AI is going to have on humanity.”

Central to the theme of AI is the technology’s use as a general-purpose tool in nearly every industry. “We need to start thinking about the massive growth in productivity that we may see over the next 10 years or so,” says Palandrani.

“We need to start thinking about the massive growth in productivity that we may see over the next 10 years or so.”

The interface opportunity

The successful rollout of AI requires two things: “Number one, high-quality data. And number two, compute-power hardware”.

Within the AI value chain, chipmakers are already reaping rewards. “Short-term, you’re clearly seeing companies like Nvidia [NVDA] truly benefitting.” As of 9 August, Nvidia is the largest holding in BOTZ, with a 13.15% weighting.

However, he continues: “I do think that this is a long-term structural trend that is going to take 10–15 years to fully play out.” Looking at previous technological paradigm shifts, says Palandrani, you can identify three phases: the initial compute phase (“that base hardware layer for machine interaction”), the infrastructure and data-management phase and the interface phase.

In the compute phase, Nvidia is the “first company that gets recognised by the market… and it’s just scratching the surface of the opportunity”. In the infrastructure phase, “you have hyperscalers, where companies like Amazon’s [AMZN] AWS and Microsoft’s [MSFT] Azure are really winning”.

However, the interface stage is wide open, Palandrani tells Opto. “I think that interface layer is still to be identified by investors.” 

In the past, “Google [GOOGL] and Amazon won as the interfaces of the internet revolution. Then Apple [AAPL] really positioned itself as the winner of the smartphone era.”

This time, it’s different. “Unlike prior paradigm shifts, interface companies are going to be the ones that already have the technology-oriented relationships, and they're going to be able to drive top-line revenue growth rates from these.”

Nevertheless, he does see the potential for a fallout. “We're going to have less IPOs, or startups that actually position themselves as these market winners.” Rather, it is more likely to be the SaaS “incumbents” — like “ServiceNow [NOW], Adobe [ADBE], Salesforce [CRM] and a few others” — that are able to adapt at scale to the interface demand.

Exposure to the AI theme

When it comes to investment philosophy, Global X’s AIQ and BOTZ funds are passive — something Palandrani believes is critical to thematic investing. “It’s important to identify the universe of companies, and essentially try to invest in that”, rather than placing a few selected bets.

AIQ offers exposure to two buckets in the AI sector, Palandrani explains. In the first bucket are “AI developers and companies that are offering AI as a service”, while the second contains the hardware companies “actually creating the semiconductors, but also potentially focusing in areas like quantum computing”.

He says many investors use AIQ as a substitute for a Nasdaq 100-type strategy to deliver added value. Magnificent Seven companies (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla [TSLA] and Meta Platforms [META]) account for approximately half of the Nasdaq 100, but AIQ caps their exposure at slightly over 3%.

Capping the largest stocks in this way “allows you to participate in the universe of companies with exposure to artificial intelligence”, says Palandrani.

Global X’s BOTZ fund invests in the global robotics market, which market research firm BBC Research has projected to reach $91.8bn by 2026.

The BOTZ fund focuses on sub-themes, including industrial and non-industrial robotics and autonomous vehicles. A key feature is that “it essentially requires companies to generate at least 50% of their revenues from the different sub-themes or in aggregate of all of these different themes”.

Until recently, says Palandrani, the focus of robotics was on cars and consumer electronics, but “the services industry is starting to finally adopt robotics and automation capabilities”.

Robotic surgery is another niche vertical that has caught the attention of Global X. “Companies like Intuitive Surgical [ISRG], with their da Vinci Surgical System, are very well-positioned to capture that market. Today, about 5–10% of all surgeries in the US are done with robotic capabilities.” Research published in 2020 by L&T Technology Services Limited predicts that number will grow to 50% by 2025.”

Intuitive is the second-largest holding in the BOTZ fund with a 9.57% weighting.

“The services industry is starting to finally adopt robotics and automation capabilities.”

The future of AI

There are several further areas of opportunity going forward, says Palandrani.

One is the transition towards GPUs. “We're truly seeing exponential demand for GPU technology… Even Tesla mentioned in their latest earnings call that they want to have access to GPU technology,” he adds.

Other areas of opportunity are more powerful device-based AI processes and the semiconductor industry’s networking market. “Back in 2019, Nvidia [NVDA] bought Mellanox [MLNX] for $6.8bn. Mellanox essentially offers that kind of networking technology that allows GPUs to communicate with each other… [and] that is critical for GPU technology and data centres.”

In the search engine space, Microsoft-owned Bing’s use of ChatGPT isn’t yet threatening Google’s dominance. Microsoft’s real top-line opportunity could be the M365 Copilot, “which will essentially allow users of Word, PowerPoint and Excel to use these generative AI features to create presentations to make sense of data and create powerful charts”.

Eventually, he believes generative AI will move beyond text and video to true science-fiction territory. “What I’m seeing is, potentially, a dynamic personalisation of content that essentially is going to allow users to create their own movies or video games.

“I think that’s where we could potentially see a lot of disruption in the next 10–15 years.”

For more ways to listen:

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Listen to the full interview and explore our past episodes on Opto Sessions. You can also check out all our episodes via our YouTube Channel.

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