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HomeRoboticsDisruptive Tech M&A Offers Defy Market Volatility

Disruptive Tech M&A Offers Defy Market Volatility


 

Whereas IPOs and SPAC offers have stalled within the face of a drop in public fairness valuations, M&A and startup funding in robotics, AI, and healthcare applied sciences has remained robust over the previous couple of quarters. 5 members of the ROBO International Innovation Indices have obtained takeout provides. On this installment of “Comply with the Cash”, we spotlight offers that illustrate the monetary and strategic attraction of key expertise traits to this point in 2022.

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Jeremie Capron:

My title is Jeremie Capron. I am the Director of Analysis right here at ROBO International, and I am speaking to you from New York. With me on the decision are my colleagues from the analysis crew, Nina Deka and Zeno Mercer. At the moment, we will speak about robotics, AI and healthcare applied sciences with a deal with offers and fundings. So, we will probably be each the general public fairness facet, the place we now have seen some main shifts within the final six months, in addition to the non-public facet and enterprise capital, and we’ll talk about a number of the key traits that we’re watching. We’ll additionally be certain that to avoid wasting time on your questions. As a lot of you already know, we frequently share a few of our analysis on the roboglobal.com web site and biweekly emails, and we simply revealed a brand new report that is overlaying at present’s presentation. So, be happy to obtain this report at roboglobal.com.

So, let me begin with a fast reminder of what we do right here. We’re a analysis and funding advisory firm that is centered on robotics, AI and healthcare applied sciences, and we designed thematic funding methods round what we consider to be a technological revolution. At the moment, there’s over $3 billion in funds monitoring our methods, they’re primarily ETFs. Essentially the most notable index might be ROBO, R-O-B-O, that was the primary robotics and automation index portfolio that launched in 2013, and now in its ninth yr. Our analysis round automation led us to comprehend that one thing necessary is going on in two particular areas. So, within the final 4 years, we launched two further index portfolios. The primary one is T-H-N-Q or THNQ, that’s the synthetic intelligence index. The second is H-T-E-C or HTEC, that’s the Healthcare Know-how & Innovation Index.

These aren’t your conventional index ETFs or funding methods mix a analysis pushed method with the advantages of index investing and the ETF wrapper. The portfolios are picks of greatest in school corporations from all over the world, small, mid, large-caps which can be roughly equal weighted and rebalanced quarterly. So, they’re diversified with the 60 to 85 holdings, but they’ve a really excessive lively share and low overlap with broad fairness indexes just like the S&P500. The three methods have outperformed world fairness since inception, as you may see on this desk of index returns as of the top of April 2022, even after the brutal decline previously few months. So, why are we speaking about M&A and fund flows? That is necessary to us as a result of M&A has been a robust tailwind to ROBO’s returns since we first designed the portfolio in 2013.

Within the eight or 9 years that we have been working it, we have seen 27 takeover makes an attempt on our portfolio corporations. That is within the context of slightly greater than 80 corporations within the index. We’ll get again to that. However the necessary level right here is that we now have seen a transparent acceleration previously two years, regardless of the numerous enterprise disruptions in the course of the pandemic. In reality, 2021 was a document yr for mergers, for acquisitions and enterprise funding. Because the pandemic actually bother charged the digitization of our financial system and left some main scars as we got here out to the opposite facet. You concentrate on the availability chain disruptions, you concentrate on rising commodity costs and transportation prices and the shortages and semiconductors, and now more and more urgent labor shortages.

So, this has led to a race to digitize, to automate, and this has made automation a prime precedence for enterprise leaders and firms all over the world. Particularly for these bigger organizations that more and more perceive, they should have a presence and capabilities round automation. In lots of circumstances, they’re behind the curve and they should purchase reasonably than construct. They’re able to pay up for high quality companies. Now, it is a very a lot structural development in our view, however the huge shift within the monetary markets over the previous six months have clearly modified the dynamics by way of capital deployments. In simply six months, we now have moved from a sort of Goldilocks of robust financial and revenue development to one of the crucial complicated macro scenario in a long time. Now we have battle in Europe, we now have oil that is up 75% previously yr, and above $100 a barrel.

Now we have indicators of a slowing consumption simply when the Fed is beginning a price hike cycle. I feel tech is actually the place the motion has been concentrated previously six months. We have seen a dramatic collapse in essentially the most extremely valued segments of the markets, essentially the most speculative areas of the market. We have seen primarily the positive factors of the pandemic being given again, and in some circumstances, some extra. It isn’t solely the Zoom and Peloton and Robin Hood, the truth is, practically half of the NASDAQ shares are down 50% or extra at present from the excessive. A couple of in 5 shares is down greater than 75%. So, that’s akin to the dot-com crash in 2000, and the FANG shares are down greater than 35% on common yr so far. Our three methods are down between 27% and 34% as of the shut yesterday, so on the Could seventeenth.

Now, that qualifies because the sharpest drawdown we now have seen since we began ROBO in 2013, and it’s on par with the selloff in the course of the COVID lockdown panic. Now, the excellent news is that in assessment, this valuation reset is essentially performed out. I’ll illustrate this with just a few charts in a minute. However earlier than that, on this subsequent slide, I need to spotlight that the expertise in market leaders in AI, in robotics, in healthcare applied sciences, the businesses in our three index portfolios, they are typically top quality companies by way of their margins, by way of their return on capital, and the energy of their stability sheets. This chart right here reveals the share of corporations with a internet money place for ROBO, HTEC and THNQ, and a number of the broad fairness industries. So, 65% of the businesses within the synthetic intelligence index, and 55% of the businesses within the ROBO index have extra cash than debt, which is a measure of stability sheet energy.

That’s much more that you will discover within the NASDAQ or the S&P500 index. Additionally, need to level out on the following slide that the businesses we’re speaking about right here, they don’t seem to be simply US corporations. You’ll be able to see right here that we now have greater than 13 international locations represented in ROBO, and that plenty of them are small and mid-caps. Between 50% and 60% of the ROBO and HTEC portfolios are in small and mid-caps. The overwhelming majority of them aren’t represented within the S&P500 or world fairness industries. So, most buyers have very restricted publicity to the businesses on the forefront of robotics, AI and healthcare applied sciences. So, let’s take a look at what’s taking place in robotics first, then I am going to cross it on to my colleagues to debate healthcare applied sciences and AI, and we’ll wrap up with what’s taking place on the enterprise capital facet.

So, it is a chart of whole returns for ROBO over the previous 5 years, simply above 12% compounded common. You’ll be able to see the names of the businesses which have obtained a takeover provide over the previous 5 years. As I stated earlier, within the eight or 9 years we have been working it, we have seen 27 takeover makes an attempt on our portfolio corporations. That is within the context of round 80 plus corporations within the index. You’ll be able to see plenty of exercise in 2020, in 2021. Since we final spoke to you about six months in the past, we have seen one other two transactions this yr in robotics index portfolio corporations. The primary one was Vocera which agreed to be acquired by Stryker in January for slightly below $3 billion. I’ll let Nina inform you extra about it as Vocera is a healthcare automation firm that was additionally a member of HTEC.

Then we promote Blue Prism. If we will flip to the following slide, please. You might have a listing of a number of the most necessary offers we have been watching over the previous few months. Blue Prism finally agreed to a takeover by SS&C, which is a personal fairness agency. That got here after a brief bidding contest with Vista Companions. So Blue Prism went for about $1.6 billion. Blue Prism is a prime three participant in robotics course of automation, which is basically software program robots that automate enterprise processes that you could find on desktop, computer systems and enterprise techniques. Within the report that you could find on the web site, we additionally talk about various necessary acquisitions made by ROBO index corporations like Zebra and its buy of Matrox Imaging to push into pc imaginative and prescient. A deal by Aptiv to spice up its autonomous driving and linked autos capabilities by buying Wind River that is a supplier of software program options for, I feel, that was round $4 billion.

So, our view is that regardless of the extra complicated macro backdrop that we’re dealing with at present, M&A is prone to stay robust in robotics automation. That is as a result of the latest market selloff is presenting engaging alternatives, and acquirers have the monetary capability to accumulate most of the smaller and mid-cap corporations. That’s one thing that I need to conclude with this historic chart of the worth earnings ratio for ROBO. You’ll be able to see that the world’s main robotics automation corporations are actually buying and selling on about 22X earnings, which is under the historic common of 24X. That it additionally under the pre-COVID ranges of 2019. That’s not too far off the 19X of the S&P500 index. So, the premium relative to a broad fairness index is comparatively low now. That’s regardless of what we anticipate will probably be superior earnings’ development over the long-term. So, I’ll depart you with that and ask Nina to hitch us and talk about traits in healthcare applied sciences.

 

Nina Deka:

Thanks, Jeremie. Hello, Nina Deka right here. Thanks for taking the time at present to hitch us. HTEC is for these of you knew the story, our Healthcare Know-how & Innovation Index, this has comprised of 80 or so greatest in school healthcare tech corporations that we consider symbolize the expansion and disruption over the following 5 to 10 years, that’s undoubtedly taking place as we converse within the healthcare sector. Because it pertains to latest efficiency, proper now, much like plenty of the macro themes that Jeremie was discussing, there was a pullback in healthcare tech. It has not been immune to plenty of the macro associated pressures, akin to rising rates of interest, issues about inflation, the growing price of debt, clearly. So, it brought about plenty of buyers to take a pause on some excessive development tech ahead names, significantly, those that may not be worthwhile or cashflow optimistic but.

However, as you may see on this chart, the ROBO International Healthcare Know-how & Innovation Index HTEC has tended to outperform the broader markets over the long-term. In reality, even in a 3 yr interval, it nonetheless continues to outperform world equities. Then, if you happen to have a look at a ten yr again check, it nonetheless double the efficiency of worldwide equities. So, we’re remaining lengthy and powerful on healthcare tech for a lot of causes. I am going to dive slightly bit deeper into a number of the M&A transactions which have taken place during the last interval. So, let’s have a look at. Jeremie talked about earlier Vocera as a result of it occurred to be an organization in each ROBO and HTEC. Vocera is a extremely attention-grabbing communications’ supplier with a big presence in healthcare. It is a expertise that you could be not have seen, and the rationale why is as a result of if it is doing its job accurately, you do not even know it is there.

What I imply by that’s, I like to provide the instance just a few years in the past, I used to be in an enormous trauma hospital in New York Metropolis, Bellevue Hospital. It is a very busy metropolis hospital and it was very loud. I used to be within the emergency room. All people was shouting, there was noise alerts in every single place. Few years later, I went into this emergency room and every part was quiet. I requested one of many nurses there, “What is going on on? Why is everybody whispering?” She stated, “Nicely, we just lately carried out Vocera, and it is actually brought about a streamlining of all of our operations. We have been capable of flip off all of the alerts and so they actually solely set off when the particular particular person must be alerted when one thing attention-grabbing has occurred. So, reasonably than having alarm fatigue, we have had all of it in our households the place you simply hear beep after beep, alert after alert.” That is harmful in a hospital surroundings once you get alarm fatigue.

So, Vocera has a manner of re-coordinating this throughout gadgets to ensure the precise particular person on the proper time will get the communication. Once you talked about M&A, effectively, what occurred? Stryker acquired them. Stryker is a world chief in orthopedics, neuro, backbone, and this firm made a $3 billion acquisition earlier this yr to accumulate this communication platform. So, that is in keeping with to Jeremie’s level, how we do count on to proceed to see M&A. That is in keeping with healthcare tech more and more turning into digitized. Healthcare is likely one of the final financial sectors to grow to be digitized. It is solely not that way back that folks have been nonetheless and perhaps nonetheless are filling out paper charts after they go to the physician workplace. So, there’s an enormous alternative for healthcare to proceed to be increasingly digitized. That’s driving and growing quantity of funding exercise.

The Stryker acquisition of Vocera is only one instance. Think about, Stryker is in every single place. They’re within the ambulance, your complete affected person’s journey, they’re within the emergency room, they’re within the working room. Then upon discharge, Strykers bought stuff that may comply with the affected person to the house. So, now with Vocera, in an integration platform, they will combine all of these gadgets and higher keep watch over the affected person, wherever the affected person is. So, after we take into consideration healthcare in long-term issues, we consider decentralization like an growing quantity of care outdoors of the partitions of the hospital, and increasingly the place the affected person is, whether or not it is their work workplace or their dwelling. So, integration, digitization platforms goes to assist these gadgets comply with the affected person wherever they go. Talking of digitization and decentralization, and on this theme, we noticed one other monster acquisition with Masimo in the course of the interval.

Though this one was fairly controversial, when Masimo introduced the acquisition of an organization known as Sound United, they misplaced a couple of third of their market cap that day. The rationale why is as a result of the market did not like the truth that this world main affected person monitoring firm acquired a client digital firm. Why does Masimo have to personal audio system? Nicely, what Masimo stated they acquired was a worldwide distribution channel. Masimo is launching a watch, not just like the Apple watch with all of the apps, however extra of a watch that’ll compete with garment and match. So, what they acquired after they purchased Sound United was a worldwide distribution alternative, an current footprint of people that already appreciated that firm and use their electronics.

What the market could be lacking although on this acquisition is that Sound United additionally has a house working system. It is a multi-room working speaker system that integrates with all of the expertise in a family. Masimo goes to combine all of their excessive tech hospital grade tools into this multi-room working system. What I envision and the corporate’s probably not speaking about that is the chance to actually convey a hospital at dwelling surroundings a lot, so that ought to one thing occur to the affected person as they transfer from room to room in their very own dwelling, that doubtlessly considered one of their screens might set off an occasion and so they might real-time get a nurse or a health care provider on the telephone by means of their speaker system and simply say, “Hey, did you fall? Are you okay?” I feel that is revolutionary, and that is the way forward for healthcare. So, after we take into consideration watch and health watches, positive, perhaps $1 billion to $2 billion market alternative. Once we take into consideration dwelling telehealth system, this might be $120 billion alternative.

I went into all this element right here as a result of I simply actually needed to focus on how a lot alternative there’s proper now for funding in healthcare expertise. The macro surroundings, though, it’s pressuring shares, it isn’t slowing down funding amongst these corporations. Exterior of digitization, there’s rather a lot taking place additionally within the diagnostics world. I am going to simply briefly contact base, Quidel announce the acquisition of Ortho Scientific Diagnostics that is anticipated to shut within the coming weeks. That is big, $6 billion. Quidel is a kind of corporations that actually confirmed their market expertise management in the course of the pandemic, this was the COVID antigen check firm. They actually modified the face of what was taking place within the pandemic and let individuals return to work. However, now that the pandemic is turning into endemic, Quidel inventory is pulled again rather a lot, and so has their COVID testing quantity. Pairing up with an organization like Ortho is actually going to assist diversify their product providing and enlarge their footprint, and Ortho is a diagnostic chief. So, we’re excited when that acquisition is predicted to shut for that to be an added asset into the HTEC portfolio.

Then, different cool issues that we’re seeing within the diagnostic house, because it pertains to tug again in COVID quantity, corporations like Danaher and Thermo Fisher Scientific are market leaders, they’re within the HTEC portfolio. These are additionally corporations the place individuals thought, “Wow, you guys had plenty of COVID testing.” However the market was anxious that there was going to be a pullback in income when COVID testing pulled again. However these corporations are so diversified that they bought plenty of devices for COVID testing during the last three years. Now, the labs can use their devices to run different assessments. So, whereas COVID volumes have come again, they’ve seen an uptick in different assessments. Persons are going to the physician for different issues now. So, we’re actually glad to see this degree of diversification, and that is what you get when you’ve a portfolio full of market leaders, akin to those which can be in HTEC. So, I’ll pause there, and switch it over to Zeno who’s going to speak about THNQ, the AI portfolio. We’ll be again round for questions on the finish of this.

 

Zeno Mercer:

Thanks, Nina. Hiya everybody. My title is Zeno Mercer, and I will be discussing the THNQ index and technique and M&A at present. I will nip the bud. I noticed a query round efficiency. So, yr to day efficiency as of at present is down 34%. So, these numbers are to April thirtieth. That is the worst selloff for expertise on this house since mainly dot-com, and that is discounting what occurred in March 2020 as a result of that was a a number of sector drop. Talking of March 2020, a number of contraction is introduced down the portfolio to these ranges of valuation. So, in March 2020, THNQ dropped to a 5X for EV-to-sales. We’re now at 5.22 for the EV-to-sales down from 11X on the excessive in 2021. We’re buying and selling at a 37% low cost to the long-term 7.1X EV-to-sales common. Whilst earnings and prime line majority beat expectations.

For instance, earnings of corporations which have reported to this point are up prime 30% versus the long-term common of 13.7%. So, you could be asking, why is THNQ performing so badly? A few of that’s apparent, world macro conflicts, inflation, simply common concern. In our opinion, that is fairly shortsighted that is why we now have long-term views on these traits, however we perceive that persons are scared and that is simply how issues are. However 2022, which nonetheless sees development in earnings and revenue prime line, in addition to a ramp up in 2023 and past in issues like autonomous autos, the metaverse, there’s simply plenty of long-term performs right here that we’re enthusiastic about. I am going to get on the M&A in a second, I simply needed to speak about this actual fast.

Out of the 72 THNQ index members, 11 are projected the submit unfavorable earnings this yr. The vast majority of those who’s below $8 of unfavorable earnings. Of these 11, 5 are projected to grow to be worthwhile within the subsequent two years. So, simply fascinated about our portfolio, we now have top quality corporations which have good money balances mentioned earlier which can be in excessive development areas. I feel the THNQ index has actually matured and confirmed itself within the face of the pandemic. In reality, it is thrived within the pandemic and what is going on on on this planet. The adoption of the digitization of every part, we have got cybersecurity turning into increasingly necessary as we undertake these applied sciences throughout eCommerce, healthcare, fintech. So, the thesis round AI permeating into all aspects of society and companies is going on.

Regardless of any short-term setbacks and fears like these, these are taking place. So, I am going to enter a few of these different areas like AV and metaverse in a second once I’m discussing one of many M&A offers. So, simply wrapping up right here, THNQ has publicity to each the picks and shovels, the infrastructure, that is community and safety, semi-cloud suppliers on the infrastructure finish. Then on the enterprise facet, these are the issues that persons are enthusiastic about of, what’s AI doing? That is the enterprise course of, the buyer, the eCommerce, manufacturing unit automation. I feel having publicity to each gives an awesome upside potential right here, particularly as we have seen simply a number of contraction within the face of optimistic information, largely. Previously week, we have began to check a rebound in excessive development shares throughout eCommerce and client perhaps indicators of being oversold.

We have got about 7% publicity to China. China does have good AI. We’re nonetheless majority US and we now have corporations across the globe, however, we have got indications of dropping controls over the expertise corporations. We’re additionally seeing de-listing fears proceed to fade. So, plenty of funds bought out of that, and so you possibly can see massive inflows in optimistic momentum if that continues to go ahead.

Shifting on to M&A. So, subsequent slide. Thanks. So, after a document 2021 that promote eight THNQ index members. As a reminder, we now have 72 in our ETF proper now in our index. Now we have not seen any new takeovers provides to this point in 2022. Since its obsession in 2018, there been 11 member takeouts. So, eight in 2021. The vast majority of these have been non-public fairness funds and consortiums taking tech corporations non-public, they noticed a price.

So, since our final M&A report in Q3 final yr, we have had three takeout provides. So these have been all in This fall 2021. That features Blue Prism, which has been mentioned earlier on this report. The opposite two have been Aspen Know-how and McAfee. So, Aspen Know-how, which is a worldwide chief in asset monetization and optimization software program for industrial corporations was acquired by Emerson at a 30% premium for $10.7 billion in October 2021. That was representing a 31X EBITDA a number of. So, Emerson is combining Aspen with their very own industrials’ workplace enterprise and can retain the Aspen model. So, not in a portfolio, however that was an attention-grabbing deal that is sensible for Emerson. On development and wrapping up final yr’s a number of take non-public.

One other THNQ member, McAfee the enterprise safety software program firm that does endpoint detection, community and information safety was taken non-public after being public for only one yr in November by an investor group comprising of Introduction, Permira, Crosspoint Capital, and plenty of others for $14 billion enterprise worth representing a 26% premium. Shifting on to a few of our THNQ index member acquisitions, Microsoft acquired Activision, which was one of many largest offers within the historical past of all offers. The bogus intelligence universe, gaming and cybersecurity have been two of essentially the most lively areas of M&A.

So, what’s Microsoft’s acquisition of Activision Blizzard imply for Microsoft and the remainder of the ecosystem? Nicely, plenty of that is the deal with the metaverse. You might have gaming, which is the apparent story behind Activision. However if you happen to look slightly deeper, the core elements of Microsoft are the way in which we work together and talk digitally, and that is altering. That is going to be extra built-in. Ultimately, 10 years from now, 20 years from now, we would not have screens we’re , might be overlaid in AI and augmented actuality on our faces, contact lenses or glasses. Microsoft realizes this and so they need the perfect expertise attainable. So, a gaming firm that is aware of find out how to design nice consumer expertise, interactive design, and actually debug complicated interactive environments is nice for them as they appear to develop into this. So, I truly met and spoke with an SVP at Microsoft a number of weeks in the past at a metaverse convention I used to be at, and it is attention-grabbing.

Once you consider metaverse, it is a buzzword, to begin with. However second of all, it is actual. If you concentrate on their merchandise like LinkedIn, Home windows, Groups, these different issues, they’re all centered on entering into this immersive surroundings. A number of that’s going to require numerous information, numerous cloud infrastructure funding. When you’re having a simulation of their digital world in the true world, and that is all being overlaid speaking real-time, that is plenty of infrastructure and communication expertise. So, I feel it is actually thrilling to see Microsoft on this planet heading into this course.

One of many issues that that requires although, as we get extra overlay expertise built-in into our lives, unlocking our passwords, we’re going passwordless, that is plenty of AI to detect in case you are who you might be. When you had intent to entry what you are making an attempt to do, requires cybersecurity and THNQ index member. Alphabet just lately made the acquisition of Mandiant cybersecurity for $4.5 billion to hitch its cloud computing division. So, as extra property and providers are digitized and automatic, cybersecurity is not only a fundamental want for these corporations, however it’s a aggressive moat, actually, to make sure that their clients, whether or not it is you and I, or enterprise clients are assured in capable of proceed working throughout more and more complicated environments. So, the THNQ index captures a number of direct cybersecurity, AI angles by means of publicity to the businesses akin to Rapid7, Cloudflare, Varonis and Darktrace. So, with that, I’ll cross it on to Jeremie.

 

Jeremie Capron:

Thanks, Zeno. The very last thing we need to contact on at present is the non-public facet enterprise capital funding. Earlier than I try this, I need to remind everyone, you may ask you questions utilizing the Q&A field on the backside. So, on the non-public facet, I feel, the one line abstract is that we had a document breaking yr in 2021, and the fast decline in tech valuations in public fairness markets is actually put a damper on public exits through IPOs and significantly specs which have just about disappeared. The funding exercise continues to be robust and it is taking place at considerably decrease valuations. I feel it is necessary to know that on the extent of the increase in 2021, we bought greater than $640 billion invested. That was a document excessive and virtually a doubling yr over yr. Two thirds of those funds went to late-stage development corporations with very massive rounds pushed by monetary establishments, together with hedge funds, looking for pre-IPO corporations.

I feel that is the place plenty of this exercise is slowed in to this point this yr. Within the meantime, we noticed early stage funding that was additionally very robust final yr, however perhaps not as excessive as late-stage. By way of the place the motion occurred, it is actually fintech corporations that raised essentially the most enterprise funding in 2021, adopted by healthcare and eCommerce and transportation. Now, wanting on the first quarter of this yr, we see that funding is steadily declined by virtually 20% with the shock within the public fairness markets. The variety of offers, nonetheless, continues to be up yr over yr, and with so robust exercise in cybersecurity, in logistics automation, and healthcare applied sciences. We count on that over the approaching month, the slowdown will proceed to have an effect on primarily the late-stage pre-IPO corporations.

We additionally see that investor curiosity stays very robust within the areas of automation, particularly options that assist with the availability chain points and the label shortages. With decrease valuations, we see a good outlook for early stage investing. Now, lastly, this is a brief record of a number of the latest offers that we’re watching intently as they contact on our areas of focus. These corporations will doubtless come onto your radar as they finally go public or get acquired. I’ll spotlight just a few of them beginning with Samsara on the higher proper nook. Samsara is a cloud-based IOT or provide chain software program firm that raised $800 million in an IPO just a few months in the past, $12 billion valuation. Samsara makes cloud-based software program options for the transportation business, the logistics business, the development business and others. What they do is they assist corporations acquire and handle information, together with tools monitoring, telematics, or how vehicles and fleets of autos transfer round, and so they do video analytics utilizing AI and a few extra.

So, Samsara went public on the $12 billion valuation. In slightly below six month, its share are actually buying and selling about 50% under the IPO worth. Now, one other one is Exotec. Exotec is a warehouse robotics firm that is primarily based in France. I am sorry. They raised $300 million at a $2 billion valuation, that was at first of the yr in January. Exotec makes the Skypod System that could be a warehouse automation system that makes use of stacked beans and robots that may attain as much as 36 ft excessive, and that is used for a really excessive density storage and retrieval, and that participates within the order achievement course of. Exotec is working with a number of the world’s largest manufacturers in eCommerce, in retail and grocery.

The final one I need to spotlight at present is Medable, which has a software program platform for medical analysis in healthcare. In addition they elevate greater than $300 million round $2 billion valuation. What Medable does is that this simple to make use of software program that connects sufferers and medical groups and medical trial websites to allow medical trials anyplace. So, that is an enormous change for the business that ought to help the increase in medical trials we’re seeing at present with the growth of precision medication and genomics specifically and gene-based therapies. So, at present, Medable is already working with over 150 decentralized trials that is distant and onsite trials, and it is the software program that permits this to occur. We expect that is going to vary dramatically the way in which medical trials are carried out going ahead. Many of the firm’s success has been pushed partially by the COVID-19 pandemic that drove up demand for distant and hybrid analysis settings.

So, with that, I’ll invite Zeno and Nina to hitch me, and we’re going to take your questions. I see that we now have just a few within the queue already. I feel we’ll begin with query round earnings projections, and revisions for the ROBO and in addition HTEC indexes. I feel that is a extremely necessary level as a result of that 30% or so decline within the ROBO and HTEC index is actually all about a number of, all about valuations. In reality, valuations have contracted by virtually 35% from the excessive. Within the meantime, earnings projections, earnings estimates have barely moved, and we’re coming to the top of this Q1 incomes season. If we have a look at the three month earnings revisions, so modifications in avenue estimates over the previous three months, what we see is that they’ve actually barely moved. So, once I have a look at ROBO first over the previous three months, the projected EPS for this yr has come down by 1.5%.

In fact, it is a mixture of the higher of surprising outcomes that we noticed total in Q1. As you already know, that occurs more often than not in public equities, the place corporations are available in and beat estimates and so they strive and ensure they do not information too excessive. So, we have seen a traditional price of beating estimates. On the identical time, administration groups have clearly turned much more cautious given the modifications within the macro backdrop. So, they’ve tended to cut back their outlook considerably or preserve it. In some circumstances, cut back it, however in mixture for ROBO, the EPS estimate has come down by 1.5%, and for HTEC it is 1.8% over the previous three months. So, actually not a lot of a change. If we have a look at subsequent yr projections, it is the identical story.

Now we have a 1.8% discount within the EPS estimate for subsequent yr. So, in fact, something might occur, and the noise round the potential of a recession has elevated. Clearly, we now have vitality costs going by means of the roof, and traditionally that has tended to result in a extra of a recessionary surroundings, however that is on the identical time, we now have a really robust momentum within the financial system at present. Once you have a look at the collected financial savings in the course of the previous two years, and also you have a look at the buyer spending patterns, client spending is sustained to extend month over month for the 4 consecutive month. The newest information level that got here out just some days in the past was exhibiting extra of that with April retail gross sales up month of the month.

On the economic facet, you have a look at the economic manufacturing numbers, they’re nonetheless exhibiting development and so they’re coming in higher than anticipated. So, I feel, in fact, we now have to be conscious that we might flip into extra of a recessionary surroundings, however for now that is not the case, and index projections are set in that context. So, I need to give the following query to Nina. I see there is a query across the money circulate relative to financing wants sooner or later. What share of corporations within the HTEC portfolio will want financing to fund development over the following few years? So, Nina, do you need to take this?

 

Nina Deka:

Yeah, positive. So, we carried out an evaluation simply to maintain monitor of the money circulate healthiness and the money scenario of the portfolio. As we talked about earlier, the vast majority of the businesses and the portfolio are internet money optimistic. However after we have a look at free money circulate, there are fairly just a few that proceed to be money circulate unfavorable as a result of these corporations are largely investing of their development in innovation. However after we drill down additional and we have a look at money stability in comparison with the money burn, what we’re discovering is barely about 5 to seven of the businesses within the portfolio may want financing within the subsequent yr or two, and that is out of about 85 names. So, by way of the % about on the excessive finish, about 8% might doubtlessly want extra financing. So, after we look additional of the composition of these specific corporations, it comprised largely of corporations like Guardant, Natera, Editas, Destiny, and these are corporations in our genomics and our precision medication sub-sector.

So, once more, corporations which can be investing closely into their R&D, their medical trials on packages which have a really excessive income market potential. To provide you an instance, Guardant proper now could be the world is awaiting information that is anticipated later, doubtlessly in September, October timeframe on one of many largest ever medical trials taking place within the genomics discipline. They’re evaluating to see whether or not or not you may draw blood. So, that check is named liquid biopsy with the blood draw, a routine blood draw that you simply get at your regular physician appointment to display screen for colorectal most cancers. The rationale why this might be revolutionary is as a result of, proper now, the display screen course of for colorectal most cancers is slightly bit extra tedious both by means of colonoscopy or by means of stool assortment at dwelling that you’d mail in. So, when you’re having a routine blood draw, have them tack on a check doubtlessly for colorectal most cancers display screen. Proving that that may work goes to open up an enormous market for a lot of, many billions of different {dollars} of screening for different potential forms of most cancers.

There are plenty of corporations which have invested closely on this liquid biopsy house during the last couple years. Within the HTEC portfolio alone, we noticed over $15 billion value of M&A. Illumina acquired Grail. There’s simply plenty of M&A individuals going after this expertise validating its market alternative. So, anyway, I convey up Guardant as a result of they’re considered one of these corporations that will doubtlessly want to lift within the subsequent couple years, however they’re engaged on one thing revolutionary, and early information is definitely exhibiting that this might be fairly promising.

 

Jeremie Capron:

Thanks, Nina. Possibly you may remind us the share of HTEC corporations which can be worthwhile or money circulate optimistic, which I consider is the overwhelming majority of what is within the portfolio. What kind of corporations are typically loss making at present with expectations of future income by way of what sort of work they do?

 

Nina Deka:

Yeah. So, a couple of third of the corporate has unfavorable earnings, and a couple of quarter of the corporate as of calendar yr 2022 is money circulate unfavorable. So, once more, these are largely comprised of perhaps the small mid-cap names within the portfolio, and so they’re diversified, however largely fall into that genomics and precision medication sub-sector. We do have plenty of corporations which can be greater than half the portfolio about 51% of the portfolio is large-cap. These are single digit, excessive single digit, low double digit growers, very steady corporations with optimistic earnings, corporations like Edwards Lifesciences, Boston Scientific, and many others. So, plenty of actual steady worth oriented names within the portfolio, however it’s diversified and it does include 49% small mid-cap. Of these, like I stated, a couple of quarter are cashflow unfavorable this yr.

A lot of them are on monitor to money circulate break even. For instance, Natera, one of many corporations I discussed. When you have a look at their money stability, merely $1 billion, however a excessive money burn price, nonetheless, they proceed to have an bettering reimbursement surroundings. They preserve getting authorization from the facilities for Medicare and Medicaid that extra of their testing goes to be reimbursable. So, what this implies is assessments that they’ve already been doing and never producing plenty of income on are going to generate extra income. A number of that’s going to proceed to drop to the underside line. So, plenty of proper issues must occur, however ought to this firm execute on plan? They may truly flip money circulate break even within the subsequent couple years. Does that reply your query, Jeremie? Or did you’ve one thing else in thoughts?

 

Jeremie Capron:

No, that is nice. Thanks. Shifting on. Now we have a query about, how the funding methods have modified with market situations by way of avoiding unprofitable or excessive P/E corporations? That is a very good query. I’d begin by reiterating that we design our methods for long-term investments, and we do not change our model together with the market fluctuations. In reality, we now have an embedded mechanism within the index development course of that ensures that each quarter, we rebalance. So, each three month, we find yourself promoting corporations which have seen their share worth transfer up essentially the most, and we purchase those who have come down essentially the most, so long as, in fact, they nonetheless qualify for the index, and we primarily suppose they’re nice long-term investments. So, you’ve that smoothing or danger administration mechanism that is embedded in our course of.

However I’d say that, usually, once more, we do not discover plenty of unprofitable corporations in our thematic index portfolios. With regards to ROBO, lower than 5% of the ROBO members are loss making, 95% are worthwhile. In lots of circumstances, extraordinarily worthwhile. These corporations have a tendency to attain very excessive on the standard issue. They’ve reality margins and excessive return on capital. It is slightly totally different in AI, and Zeno talked about that we now have 11 out of 72 members within the AI portfolio which can be misplaced making, so it is slightly extra. In healthcare applied sciences, it is much more, simply round 30%. However, once more, robotics automation, it is stomach any. Now, by way of the excessive P/Es, that is a very good query, and I feel you will discover it shocking that, the truth is, we now have extra corporations in ROBO which can be buying and selling on very low multiples than we now have corporations which can be buying and selling on excessive multiples.

The metric I am going to use right here is that gross sales a number of, the EV-to-sales the place we now have about 10 corporations or so. In ROBO, they’ve a double digit EV-to-sales a number of, so each 10X, which one might qualify as costly. However we now have greater than a dozen which can be buying and selling under one occasions EV-to-sales, and that’s outstanding. These corporations are typically concerned in industrial finish markets. There is a good member of Japanese manufacturing unit automation specialists which have a excessive publicity to China. Whereas, we have seen a renewed lockdown scenario that has severely impacted the availability chains and the economic finish markets. That is most likely why these corporations are buying and selling at comparatively distressed ranges proper now, for concern that the scenario might deteriorate within the China market.

Total, our view is that the perfect time to spend money on applied sciences when the valuations are low. If in case you have an extended sufficient time horizon, it is a excellent recipe. So, another query across the M&A market. I feel, Zeno, you possibly can take a shot at that. How will we see the general public market de-rating impacting the M&A market? Is {that a} maintain or only a short-term correction?

 

Zeno Mercer:

Yeah. There’s undoubtedly a correlation with M&A exercise and the re de-rating and the general public fairness market sentiment. Regardless of what brought about analysis, contraction corporations are evaluating their strategic strikes. On the opposite facet, you’ve corporations which have massive catch stability sheets which can be nonetheless capable of make acquisitions throughout this time that they will make $10 billion acquisitions for a few of these corporations and that would not influence them that a lot. Now, they may wait, they could be holding off, as we have seen, we have had zero like M&A has slowed down within the THNQ index, for instance, on each ends, each buying excluding Activision Blizzard and a number of the larger ones. These are long-term strategic performs which can be elementary to the corporate.

On the opposite facet, since you could be seeing much less inventory compensated buyouts as a result of they’re at depressed inventory valuation, so that they’d reasonably be shopping for again their inventory than promoting an organization with depressed firm shares. So, there’s truly an impetus that you simply may see with all the company VC that is occurred. Company VC is at its peak, it might keep and continue to grow, however there’s so many strategic acquisitions which were blade on the market that you simply truly may see plenty of money stability sheet acquisitions for these AI and robotics and different corporations resulting from that strategic implementation. If there’s an organization that can drive worth for these corporations over the long-term, and so they’ve made an funding, they will purchase it. So, if we’re at zero now, comparatively, the one manner we will go is up from right here.

However, I feel that is the place we’re at, sentiment sort of improves. Nicely, these corporations, aren’t evaluating M&A alternatives. With Ukraine and simply China provide chain, I feel there’s simply been a pair issues that folks have been cautious about. However, in any other case, I feel that is only a core a part of enterprise and there are plenty of acquisitions final yr. So, a short lived pause simply to combine a few of these M&A acquisitions additionally make sense. So, there’s various components there, however I do suppose it will ramp up small mid-cap after which massive corporations with stability sheets could make strikes regardless.

 

Jeremie Capron:

Okay. Thanks, Zeno. I feel we have lined all of it. So, I need to thank everybody for becoming a member of us at present and be happy to succeed in out through our web site, roboglobal.com if you wish to ask the analysis crew any query. You may as well join biweekly analysis e-newsletter, and we very a lot look ahead to talking to you once more quickly. Have an awesome day. All people bye-bye.



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