The AI sector has been a bright spot for the stock market, leading the S&P 500 (GSPC) rally in recent months. In 2024, it's shaping up to continue leading bullish sentiment with new advanced products and major deals from companies like Microsoft (MSFT) and Alphabet (GOOG,GOOGL). Jefferies Senior Analyst Brent Thill joins The Morning Brief to give insight into the AI sector and what investors need to know when buying into certain names.

Thill points out that big names in tech still have a ways to go as the fruit of their labor may not be fully realized until 2025: "There's chatter that Microsoft is putting up $100 billion new data center in...You can't do this if you're a start-up. This is why all these AI startups are starting to find partners, OpenAI with Microsoft, Enthropic with Amazon and Google here with Oracle. You're seeing alliances, and those alliances are coming together and building software. Again, it will be a bigger user for software for the internet and AI in 2025 and '24 and we'll start to see the ramp of these proof of concepts go in production, most likely in the back half of this year."

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Editor's note: This article was written by Nicholas Jacobino

Video Transcript

BRAD SMITH: Our next guest predicting this year, we will see concrete steps with names like Microsoft to benefit from the advances. Let's bring in Brent Thill, Jefferies senior analyst to discuss where investors should be looking. Brent, always a pleasure to grab some time with you and get your insights. Take us into the thesis here and it's really going to come on what may be the pricing mechanism here and come down to the pricing that for some of these solutions companies like Microsoft are putting into the market.

BRENT THILL: Yeah. AI was a hype year in '23, '24 will be a start of the implementation and '25 will really be the revenue year. So we still have a ways to go for software. So if you look at companies like NVIDIA, Dell, all the hardware infrastructure. All the intentions there because all these companies that are putting AI in are having to put those that critical infrastructure in now. The software companies are all buying those companies to enable their services. But those services and most parts aren't even live yet today.

And they're in what we call POC or proof of concept. So companies are trialing them but they won't go live until later in '24. So the way to play high right now in our opinion is our clients are continuing to be long, the hardware and semi names, NVIDIA, AMD, Dell. And then as we get to the later in the year, there's going to be a switch over. We believe more to software because the software services will go live on top of that hardware.

And so if you've seen the SMH, which is the semi index, has absolutely ripped year to date and the ECG which is a software index is massively underperformed as many of our clients say the ECG stands for I give up. Why don't I just own the semi index? So right now we look at companies like Microsoft, Amazon, Google in really good shape and there are three characteristics for AI to work. You have to have data. You have to have users. And you have to have a lot of money.

I mean, there's chatter that Microsoft's putting a $100 billion new data center in who knows if that number is right even if it was wrong by 50%. You're talking about a $50 billion data center. These are not-- you can't do this if you're a startup. And this is why all these startups are starting to find partners, OpenAI with Microsoft, Anthropic with Amazon and Google Cohere with Oracle. You're seeing alignments and those alignments are coming together, they're building the software.

And that again will be a bigger year for software and internet for AI. In 2025 and '24, we'll start to see the ramp of these proof of concepts go into production most likely in the back half of this year again. But they're going to be baby implementations. Little AI projects here and there. So we're not going to see mass market for a while because companies are still struggling with data governance.

And is AI going to go wrong? And is the intern going to try to query the payroll data for the employee base. All the things that you worry about. And so you have to be very careful. So it's going to start private. It's going to start small. And it's going to build over time. And so the enterprise plays that we like would be Microsoft and Amazon. And the consumer plays we like would be meta and Google.