REMEMBER THE TECH BUBBLE? TO AVOID A REPEAT PERFORMANCE IN ROBOTICS & AI, DIVERSIFICATION IS KEY
As the stock market has slowed in recent months, more than a few investors have begun to wonder: Are we in the next bubble for technology stocks?
It’s a worthy question. All it takes is a brief look at the history of the stock market to understand why the alarm bells are ringing. At the height of the tech bubble in 2001, 4 of the top 7 market-cap leaders were technology companies. At the height of the oil bubble in 2008, 5 of the top 7 market-cap leaders were in the energy sector. And at the beginning of 2018, the highest-flying large-cap stocks were all rooted in the universe of FANG—the investor slang term for Facebook, Apple, Netflix, and Google. These stocks and others with similar business models rooted in technology and AI have continued to outperform throughout the first half of 2018, but there is plenty of speculation that the bubble will eventually burst. So what’s an investor to do?
Robotics, automation, and artificial intelligence—or RAAI—is already viewed by many as a must-have when it comes to future-proofing your portfolio. The reason: it’s clear that these technologies are here to stay. Companies like Amazon and Wal-Mart rely on logistics automation to further strengthen their global dominance. The availability of Big Data has made AI a competitive mandate for nearly every industry, including retailers, insurance providers, automobile manufacturers, and more. Robots are transforming healthcare, agriculture, and manufacturing as we know it. There’s no turning back, which makes RAAI one of the most important investment opportunities of our generation.
The good news is that, though the high-flying nature of RAAI stocks can feel much like the dot-com bubble of years past, there are key differences that set the two markets apart. First, in the early 2000s, many dot-com companies were much more speculative than investors chose to believe. Built up by VC investors, many had no tangible deliverable, no profits, and negative operating margins. It was a house of cards that was bound to come crashing down, and crash it did.
In contrast, today’s RAAI companies are highly tangible. Yes, they are benefitting from some of the world’s most innovative ideas, but in this case, those ideas are already delivering on their promise:
- Intuitive Surgical, the global leader in surgical robotics that are increasingly used in a rapidly broadening range of procedures, saw its market capitalization expand from $1B to $50B in the past 15 years. Today, the company is on track to generate more than $1.5B in operating profits this year, with 70% of its revenue recurring in nature.
- Nvidia, whose graphics processing units have become the de facto standard to train artificial intelligence in datacenters and to power autonomous driving systems, boosted its valuation by more than 10x in the past three years. In 2Q18 alone, revenue grew more than 65%, compared to its already impressive 18% average growth in the past 5 years.
- Ocado, the UK-based online grocer that developed cutting-edge warehouse automation technology, already doubled its share price in 2018. Adding more fuel to the fire, the company just announced a game-changing partnership with Kroger to deploy robotics-automated order fulfilment technology in 20 US grocery facilities.
- Brooks Automation, a leading provider of automation and cryogenic solutions, saw its shares more than triple in price in the past two years. Its booming life science systems business that automates bio sample management in pharma, biotech, and research organizations has set it on a clear trajectory for significantly faster growth.
These are just a handful of the most stunning examples among a long and growing list of technology and applications providers who are already putting the power of robotics, automation, and AI to work in the real world—and delivering real-world returns as a result. And yet, as is true in any sector, investing in RAAI can still put your portfolio at risk if you invest only in the largest market-cap firms within this vast landscape. Unfortunately, that’s precisely how many investors are currently attempting to capture this tremendous growth. As we’ve seen time and time again, when it comes to new technology, today’s biggest winners may not be at the top of the charts tomorrow. Blackberry, AOL, and Betamax were all Wall Street darlings until, almost overnight, they weren’t. Even Apple has seen its dark days. So how to you choose stocks in a complex, global sector that can be difficult, at best, to understand and navigate.
When we developed the first RAAI index back in 2013, we faced that challenge head on. Since the beginning, we’ve relied on the strength of our research and advisory team—a growing panel of many of the world’s top industry innovators, academics, and entrepreneurs who specialize in robotics and AI. Their knowledge, insights, and guidance help us better understand which technologies and applications are poised for growth, which are likely to falter, and why.
Rather than relying only on the largest-cap players, the ROBO Global Robotics & Automation Index uses a modified equal-weighted strategy to ensure diversification across the entire value chain, across geographies, and across a variety of business models. From equipment makers to software and services providers, these companies specifically help in weaker market regimes. This approach also offers greater exposure to small-cap and mid-cap companies that, in many cases, are not well covered by Wall Street. The index is also designed to include companies in every area of RAAI. From IOT, to smart homes, to Industry 4.0, and covering growing sectors such as logistics automation, healthcare, food and agriculture, security and surveillance, 3D printing, and more.
A stock ‘bubble’ is often defined as investing in hot stocks that, ultimately, fail to deliver returns over the long term. As a whole, robotics, automation, and AI offer solid, tangible technologies and applications that are already driving growth and disrupting the norm. Earnings are steady and growing. Demand is increasing at a rapid pace. Even in a downturn, RAAI should weather the storm well and continue to outpace global indices for years to come.
By Travis Briggs and Jeremie Capron, ROBO Global
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