Despite the hardships 2022 delivered, a brief look at where we are today offers a much-needed source of optimism for what may make our wishes for a more fruitful New Year come true. On the downside, big tech’s recent fall from grace was one for the history books, with the past decade’s stock market darlings ending the year as notable laggards.
But there was positive news as well, with 2022 bringing important breakthroughs in automation—the sole focus of our research at ROBO Global. In artificial intelligence (AI), Dall-E and ChatGPT demonstrated the profound impacts of technology using generative AI that enables anyone to create illustrations and text at lightning speed with just a few simple instructions to a computer program. On the robotics front, pandemic-driven supply chain disruptions created a major push toward factory and warehouse automation, thrusting companies that deliver collaborative robots and adaptive-control machining into the spotlight. We believe automation continues to be one of the world’s most consistent and profitable themes.
There is likely more growth to be seen across the landscape of automation, including robotics, AI, and healthcare technology. Yes, stocks are coming off their worst year since 2008, but one of the best things about the New Year is the opportunity for a fresh slate. As evidenced by the gains across our indices, 4Q22 brought some stabilization and green shoots that may be setting the stage for growth.
ROBO: Robotics & Automation Index
The ROBO Global Robotics & Automation Index (ROBO) returned 12.1% in Q4, outperforming the 9.8% gain for the MSCI AC World Index during the quarter. After a record 42% drawdown from its November 2021 high through September 2022, the index of best-in-class robotics & automation equities around the world rose in the double digits, led by strong gains in Europe (+25%) and Logistics Automation (+20%), while US (+7%) and 3D printing (-14%) stocks lagged.
While the 33.1% annual decline in 2022 was unprecedented since the inception of the ROBO index in 2013, it came after a 120% cumulative gain in the prior three years, and it was driven by a 1/3 compression in valuation multiples: ROBO is trading on a forward PE ratio of 22x compared to 33x a year ago. In the meantime, earnings have remained on a robust growth trajectory, reflecting the continued strength of demand for automation technology and solutions, and the ability of companies in the ROBO to cope with rising cost and supply chain challenges. Earnings estimates for 2022 and 2023 have been cut by 0-4% over the past 3 months and by 9-10% over the past 12 months. Meanwhile, revenue estimates have remained nearly unchanged and currently point to 11% YoY in both 2022 and 2023.
Logistics Automation, which accounts for 14% of the index by weight, saw a 20% gain in Q4 after three consecutive quarters of losses but remains down 44% for the year and back to pre-Covid levels, despite the significant increase in business volumes. Similarly, Sensing, Actuation, and 3D printing are all trading below pre-Covid levels, which is particularly interesting since that was low in the industrial cycle. The good news is that manufacturing PMIs around the world are now below 50, a level that has historically provided excellent entry points in Factory Automation stocks (1/3 of the ROBO portfolio). Yet contrary to prior industrial downcycles, order backlogs at market and technology leaders remain extraordinarily high and provide business leaders with much better visibility than in prior soft markets.
We also expect Japanese companies, which account for 22% of the ROBO index and have a combined 40% share of the world’s industrial robot market, to benefit from 1) the robust economic recovery in China after a chaotic path out of Covid restrictions, and 2) the dramatic depreciation in the Japanese Yen, which provides a substantial cost advantage and should lead to margin expansion.
THNQ: Artificial Intelligence Index
The ROBO Global Artificial Intelligence Index (THNQ) rose 4.4% in Q4, underperforming the MSCI AC World Index (+9.8%) and S&P 500 (+7.6%). Valuations contracted further, down to 4.5x Forward EV/Sales vs 6.9x historical average. Q4 saw sales growth of 18%, while EBITDA growth accelerated to 32% vs the 17% historical average since 2013.
In the last quarter of 2022, the absolute standout development in Artificial Intelligence was the fulgurant adoption of generative AI models across language, image, and video applications, taking the world by storm. Companies like Microsoft are already implanting Open AI’s technology such as GPT-3 and DALL-E-2 into enterprise and consumer products such as 365 and Bing search. We expect commercialization and subsequent downstream utilization to further benefit the entire space.
We saw a strong turnaround in one of the worst-performing subsectors in the year up to Q3: Semiconductor (17% weighting), which was up 21%, with rapidly growing exposure to IoT, Cloud, AI, and Automotive. We saw further cloud infrastructure CapEx and large project announcements, including a $40 billion Taiwan Semiconductor 3nm chip fab in Arizona (further benefiting fellow index members like ASML, Lam Research, and Teradyne).
The Consumer subsector (6% weighting) also saw strong performance +13%, driven by gains from companies like Booking Holdings seeing strong bookings growth, Netflix seeing strong net new subscribers and positive development on pricing models, and Electronic Arts landing a Marvel partnership and seeing EPS guidance raise. Consumer had been one of the first areas to get hit negatively by inflation fears and has since been among the first to rebound.
Network & Security (13% weighting), which had been the year's strongest performing subsector with mixed performance, saw a few companies like Crowdstrike, Rapid7, and Snowflake decline significantly on concerns over slowing growth. We are still encouraged and have a strong conviction here as this area remains a priority across governments and corporations.
The biggest laggard was Cognitive Computing, which was down 18% entirely due to Tesla’s 54% drop during the quarter. The market is realizing that Tesla isn’t the only EV player anymore (market share in the US for EVs has declined 10% as incumbents and new players enter the space), while Elon Musk’s foray with Twitter hasn't entirely appeased shareholders either. We continue to regard Tesla as a technology and market leader.
HTEC: Healthcare Technology & Innovation Index
The ROBO Global Healthcare Technology & Innovation Index (HTEC) rose +6.9% in Q4, slightly underperforming S&P Global’s +7.5% gain. While much of the public discourse has been focused on Covid, innovation in healthcare continues at an accelerating pace. For the year ending 2022, the HTEC index declined 33%, underperforming major indices such as S&P 500 and ACWI’s 18% decline. HTEC index was trading on 4x Forward EV/sales at the median, compared to the February 2021 high of 7.2x.
Overall, 2022 was a challenging year for HTEC index members versus the global market indices. While there were many strong performers during the fourth quarter and six of the nine sub-sectors posted positive returns, HTEC declined ~33% for the year compared to ACWI and S&P 500’s -18% decline.
Specifically, during the fourth quarter, subsectors such as Robotics, Medical Instruments and Diagnostics posted solid gains driven by procedural recovery and M&A demand for innovative cardiovascular solutions. In the largest-ever acquisition in the MedTech industry, J&J announced its intent to acquire HTEC index member Abiomed (+50%) for $16.6 billion. With 18 years of profitable growth with its breakthrough technologies for heart and lung support, Abiomed is disrupting the $77 billion cardiovascular industry. Less invasive solutions that allow for short hospitalizations for improved outcomes remain a core emphasis in the HTEC portfolio. In addition, index members such as JD Health (+59%), Exact Science (+52%) and Tactile (+47%) also demonstrated outperformance during the quarter as next-generation diagnostic solutions and clinical care solutions were in strong demand as the world showed signs of normalcy after long periods of covid lockdowns.
Meanwhile, the Genomics subsector continues to be a mixed bag with index members Guardant Health (-49%) and Nanostring (-38%) were under pressure during the quarter while Veracyte gained +43%. Specifically, Guardant Health’s latest study around their colorectal blood screening test brought concerns about the commercialization prospects. While shares have been reset with this disappointing data on efficacy rates, it will still provide less invasive options for hundreds of thousands of people screening for colorectal cancer every year. On the positive front, Veracyte raised its full-year 2022 forecast and posted a 25% Y/Y rise in quarterly revenue, helped by strong performance in its cancer diagnostic tests. Veracyte uses AI-enabled genomic technology to speed up medical diagnosis and provide earlier treatment for those at high risk for thyroid and prostate cancer. While the companies in our Genomics sub-sector showed volatility in the past year, the severe multiple compressions will provide significant upside opportunities for 2023. Long-term drivers and demand for genomic technologies have only strengthened our Genomic index members and. HTEC remains well-positioned.