ROBO GLOBAL Q3 2017 REVIEW
The ROBO Global Robotics & Automation Index gained over 13% for the quarter and a total of 36% in the first nine months of 2017. ROBO continues to outperform most global equity indices.
ROBOTICS MARKET CONTINUES TO RISE
This was another in a string of profitable quarters for investors. 3Q17 marked the eighth consecutive quarter of positive returns in the U.S. stock market. Not only were stocks higher in the third quarter, but nearly every major asset class moved higher. The S&P 500 rose nearly 4%. The Nasdaq composite gained almost 6%, its fifth straight positive quarter since 2015. The MSCI All Country World Index rose 5%.
We remain steadfast in our belief that RAAI (Robotics, Automation & Artificial Intelligence) is one of the best investment opportunities available to investors. While this industry has quietly outperformed most traditional indices the last 52 weeks, we believe this megatrend is just starting. Recent developments in robotics, artificial intelligence (AI), and machine learning have put us on the cusp of a new age of automation. These technologies are being applied to all industries and all markets.
The ingredients for a breakthrough are in place. Computing power is growing significantly, algorithms are becoming more sophisticated, and perhaps most important of all, the world is generating vast quantities of the fuel that powers artificial intelligence, data, at the frenetic pace of billions of Gigabytes every day. AI can go beyond improving business processes to changing entire business models with winner takes all dynamics. Firms waiting for the AI dust to settle will be left behind. AI has the potential to accelerate shifts in market share, revenue, and profit pools – all hallmarks of digitally disrupted sectors.
We believe investors need to align their portfolio for the RAAI revolution. The ROBO Global Robotics & Automation Index was designed to measure and capture the global value chain of technologies and applications that facilitate the growth of RAAI.
We continued to refine the ROBO Global Industry Classification and made several enhancements to the index at the September rebalance, including the strengthening of the Computing, Processing & AI subsector with the additions of Xilinx and Cadence.
Capturing the 4th tectonic shift in computing
We view Nvidia, Xilinx and Cadence Design Systems as key enablers of the fourth tectonic shift in computing: machine learning and artificial intelligence. The two additions as of September 2017 round out the ROBO Global Robotics & Automation Index’ exposure to providers of the critical tools and components of this next-generation computing architecture, along with Nvidia.
Datacenters around the globe are scrambling to adapt to the new, enormous compute requirements created by the rapid development of AI. Nvidia’s Graphics Processing Units (GPU) dominate in the training of AI. The company shocked the markets earlier this year when it projected this would be a $30 billion market by 2020.
Xilinx is the leader in the duopoly supplying programmable logic devices, including Field Programmable Gate Arrays (FPGA), programmable Systems on Chips and 3D Integrated Circuits, which play a key role in the shift towards flexible and heterogeneous compute architecture required for AI.
Cadence is the leading supplier of electronic design automation tools and intellectual property that is used for designing semiconductor chips and electronic systems.
BEST EARNINGS SEASON IN SIX YEARS
The third quarter was marked by the best earnings season in six years for ROBO index members, as discussed in ‘Summer Brings Best ROBO Earnings Report in Six Years.’ The median EPS growth reached 24% YoY, significantly better than anticipated and the fastest since 2011. 78% of index members beat consensus EPS estimates. Median revenue growth accelerated to 9%, led by a return to double-digits in some of the largest subsectors of the index, including Actuation, Sensing, Industrial Automation and Healthcare.
For the first time since 2007, capacity constraints are starting to emerge in various areas of the supply chain. Suppliers are struggling to keep up with booming demand for industrial automation and robotics. Despite manufacturers’ aggressive expansion plans, shortages, extended lead times and growing backlogs are increasingly apparent. These trends helped propel Yaskawa (+50%) and Harmonic Drive (+49%) into the top-3 in terms of 3Q returns. Daifuku, the global leader in logistics automation, raised its full-year outlook after a 145% surge in orders and was the best stock in the quarter, returning 65%. Meanwhile, 3D printing companies generally disappointed with three out of four companies experiencing renewed declines in sales. 3D Systems was the worst performer in 3Q (-28%), followed by Accuray (-16%) and Manhattan Associates (-13%).
M&A remains an important theme in Robotics & Automation. Index members have deployed or announced more than $24bn in M&A in the past six months, excluding Qualcomm’s tender offer for NXP Semiconductors (~$38bn), with European powerhouses ABB, Schneider and Siemens making multi-billion-dollar deals in industrial automation (Bernecker & Reiner, GE Industrial Solutions), software (Aveva) and rail (Alstom). Of note, the pace of acquisitions in AgTech is picking up and Deere acquired Blue River Technologies, a pioneer in applying machine learning to agriculture, for over $300m. Hexagon and Dassault Systems made large acquisitions to bolster their simulation software offerings.
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