Regardless of the hardships 2022 delivered, a short have a look at the place we’re as we speak affords a much-needed supply of optimism for what could make our needs for a extra fruitful New Yr come true. On the draw back, massive tech’s latest fall from grace was one for the historical past books, with the previous decade’s inventory market darlings ending the yr as notable laggards.
However there was optimistic information as effectively, with 2022 bringing vital breakthroughs in automation—the only focus of our analysis at ROBO World. In synthetic intelligence (AI), Dall-E and ChatGPT demonstrated the profound impacts of expertise utilizing generative AI that allows anybody to create illustrations and textual content at lightning velocity with only a few easy directions to a pc program. On the robotics entrance, pandemic-driven provide chain disruptions created a serious push towards manufacturing facility and warehouse automation, thrusting firms that ship collaborative robots and adaptive-control machining into the highlight. We consider automation continues to be one of many world’s most constant and worthwhile themes.
There’s seemingly extra development to be seen throughout the panorama of automation, together with robotics, AI, and healthcare expertise. Sure, shares are coming off their worst yr since 2008, however the most effective issues in regards to the New Yr is the chance for a contemporary slate. As evidenced by the good points throughout our indices, 4Q22 introduced some stabilization and inexperienced shoots which may be setting the stage for development.
ROBO: Robotics & Automation Index
The ROBO World Robotics & Automation Index (ROBO) returned 12.1% in This fall, outperforming the 9.8% acquire for the MSCI AC World Index in the course of the quarter. After a document 42% drawdown from its November 2021 excessive by way of September 2022, the index of best-in-class robotics & automation equities around the globe rose within the double digits, led by robust good points in Europe (+25%) and Logistics Automation (+20%), whereas US (+7%) and 3D printing (-14%) shares lagged.
Whereas the 33.1% annual decline in 2022 was unprecedented for the reason that inception of the ROBO index in 2013, it got here after a 120% cumulative acquire within the prior three years, and it was pushed by a 1/3 compression in valuation multiples: ROBO is buying and selling on a ahead PE ratio of 22x in comparison with 33x a yr in the past. Within the meantime, earnings have remained on a sturdy development trajectory, reflecting the continued power of demand for automation expertise and options, and the power of firms within the ROBO to deal with rising value and provide chain challenges. Earnings estimates for 2022 and 2023 have been reduce by 0-4% over the previous 3 months and by 9-10% over the previous 12 months. In the meantime, income estimates have remained practically unchanged and at the moment level to 11% YoY in each 2022 and 2023.
Logistics Automation, which accounts for 14% of the index by weight, noticed a 20% acquire in This fall after three consecutive quarters of losses however stays down 44% for the yr and again to pre-Covid ranges, regardless of the numerous enhance in enterprise volumes. Equally, Sensing, Actuation, and 3D printing are all buying and selling beneath pre-Covid ranges, which is especially attention-grabbing since that was low within the industrial cycle. The excellent news is that manufacturing PMIs around the globe are actually beneath 50, a degree that has traditionally supplied glorious entry factors in Manufacturing facility Automation shares (1/3 of the ROBO portfolio). But opposite to prior industrial downcycles, order backlogs at market and expertise leaders stay terribly excessive and supply enterprise leaders with a lot better visibility than in prior mushy markets.
We additionally count on Japanese firms, which account for 22% of the ROBO index and have a mixed 40% share of the world’s industrial robotic market, to profit from 1) the strong financial restoration in China after a chaotic path out of Covid restrictions, and a couple of) the dramatic depreciation within the Japanese Yen, which supplies a considerable value benefit and will result in margin enlargement.
THNQ: Synthetic Intelligence Index
The ROBO World Synthetic Intelligence Index (THNQ) rose 4.4% in This fall, underperforming the MSCI AC World Index (+9.8%) and S&P 500 (+7.6%). Valuations contracted additional, all the way down to 4.5x Ahead EV/Gross sales vs 6.9x historic common. This fall noticed gross sales development of 18%, whereas EBITDA development accelerated to 32% vs the 17% historic common since 2013.
Within the final quarter of 2022, absolutely the standout improvement in Synthetic Intelligence was the fulgurant adoption of generative AI fashions throughout language, picture, and video functions, taking the world by storm. Corporations like Microsoft are already implanting Open AI’s expertise reminiscent of GPT-3 and DALL-E-2 into enterprise and shopper merchandise reminiscent of 365 and Bing search. We count on commercialization and subsequent downstream utilization to additional profit all the area.
We noticed a robust turnaround in one of many worst-performing subsectors within the yr as much as Q3: Semiconductor (17% weighting), which was up 21%, with quickly rising publicity to IoT, Cloud, AI, and Automotive. We noticed additional cloud infrastructure CapEx and huge challenge bulletins, together with a $40 billion Taiwan Semiconductor 3nm chip fab in Arizona (additional benefiting fellow index members like ASML, Lam Analysis, and Teradyne).
The Client subsector (6% weighting) additionally noticed robust efficiency +13%, pushed by good points from firms like Reserving Holdings seeing robust bookings development, Netflix seeing robust web new subscribers and optimistic improvement on pricing fashions, and Digital Arts touchdown a Marvel partnership and seeing EPS steerage increase. Client had been one of many first areas to get hit negatively by inflation fears and has since been among the many first to rebound.
Community & Safety (13% weighting), which had been the yr’s strongest performing subsector with combined efficiency, noticed just a few firms like Crowdstrike, Rapid7, and Snowflake decline considerably on considerations over slowing development. We’re nonetheless inspired and have a robust conviction right here as this space stays a precedence throughout governments and firms.
The most important laggard was Cognitive Computing, which was down 18% totally attributable to Tesla’s 54% drop in the course of the quarter. The market is realizing that Tesla isn’t the one EV participant anymore (market share within the US for EVs has declined 10% as incumbents and new gamers enter the area), whereas Elon Musk’s foray with Twitter hasn’t totally appeased shareholders both. We proceed to treat Tesla as a expertise and market chief.
HTEC: Healthcare Expertise & Innovation Index
The ROBO World Healthcare Expertise & Innovation Index (HTEC) rose +6.9% in This fall, barely underperforming S&P World’s +7.5% acquire. Whereas a lot of the general public discourse has been targeted on Covid, innovation in healthcare continues at an accelerating tempo. For the yr ending 2022, the HTEC index declined 33%, underperforming main indices reminiscent of S&P 500 and ACWI’s 18% decline. HTEC index was buying and selling on 4x Ahead EV/gross sales on the median, in comparison with the February 2021 excessive of seven.2x.
General, 2022 was a difficult yr for HTEC index members versus the worldwide market indices. Whereas there have been many robust performers in the course of the fourth quarter and 6 of the 9 sub-sectors posted optimistic returns, HTEC declined ~33% for the yr in comparison with ACWI and S&P 500’s -18% decline.
Particularly, in the course of the fourth quarter, subsectors reminiscent of Robotics, Medical Devices and Diagnostics posted strong good points pushed by procedural restoration and M&A requirement for revolutionary cardiovascular options. Within the largest-ever acquisition within the MedTech trade, J&J introduced its intent to accumulate HTEC index member Abiomed (+50%) for $16.6 billion. With 18 years of worthwhile development with its breakthrough applied sciences for coronary heart and lung help, Abiomed is disrupting the $77 billion cardiovascular trade. Much less invasive options that enable for brief hospitalizations for improved outcomes stay a core emphasis within the HTEC portfolio. As well as, index members reminiscent of JD Well being (+59%), Actual Science (+52%) and Tactile (+47%) additionally demonstrated outperformance in the course of the quarter as next-generation diagnostic options and scientific care options have been in robust demand because the world confirmed indicators of normalcy after lengthy intervals of covid lockdowns.
In the meantime, the Genomics subsector continues to be a combined bag with index members Guardant Well being (-49%) and Nanostring (-38%) have been beneath stress in the course of the quarter whereas Veracyte gained +43%. Particularly, Guardant Well being’s newest examine round their colorectal blood screening take a look at introduced considerations in regards to the commercialization prospects. Whereas shares have been reset with this disappointing information on efficacy charges, it is going to nonetheless present much less invasive choices for a whole lot of hundreds of individuals screening for colorectal most cancers yearly. On the optimistic entrance, Veracyte raised its full-year 2022 forecast and posted a 25% Y/Y rise in quarterly income, helped by robust efficiency in its most cancers diagnostic checks. Veracyte makes use of AI-enabled genomic expertise to hurry up medical prognosis and supply earlier remedy for these at excessive danger for thyroid and prostate most cancers. Whereas the businesses in our Genomics sub-sector confirmed volatility previously yr, the extreme a number of compressions will present important upside alternatives for 2023. Lengthy-term drivers and demand for genomic applied sciences have solely strengthened our Genomic index members and. HTEC stays well-positioned.
