Do we follow the stars under a cloudy sky? This year’s stock market trading has certainly been characterized by a lot of anxiety as the market struggles to find its true north. For all the mental scar tissue around what could go wrong, it was remarkable to see how much did go wrong. Not only has economic growth remained relatively strong amid easing inflation, but consumer spending and corporate margins have also remained at healthy levels. Yes, the skies seem to have been overcast at times, but when will this market abandon the fear that every cloud can bring torrential rain?
In the month of August, U.S. stocks ended lower as the S&P 500 and Nasdaq-100 posted their first monthly declines since February. The ROBO indices experienced similar weakness to the index Robotics and Automation Index (ROBO) down -7.6%, Health Technology and Innovation Index (HTEC) contracting -7.2% a The Artificial Intelligence Index (THNQ) is down -4.9%. While AI is still the main bullish theme here, the Nasdaq 100 (heavily weighted in the tech space and thus the AI discussion) is down 1.5% for the month, but is still up more than 42% year-to-date.
The upcoming long weekend in the US certainly offers a nice opportunity to take advantage a step back from the markets and prepare for sprint to the end of the year. How we all sharpen our pencils remains a question what mark this market will get next semester? It feels like a refrain at home “smooth landing” louder and louder Goldilocks data prints. Of course, there was some recovery earlier this week “bad news is good news” story amid soft economic data.
Investors have certainly had plenty to think about over the past few months as we all continue to assess the trajectory of financial conditions. However, most encouragingly, inflation is easing without holding back global growth. The consumer remains strong – especially in the US – and ironically the risks to growth seem more likely than a potential slowdown.
All eyes turned to Nvidia (NVDA) last week – up An artificial intelligence star that keeps getting brighter. By the end of the fiscal year next January, Nvidia is expected to bring in revenue north of $50 billion, nearly double last fiscal year and nearly five times annual revenue in fiscal 2020.
The bump flows right through to Nvidia’s bottom line. Its net profit margin reached 46% in the quarter, compared to 10% in the year-ago quarter. Just for comparison, Intel hasn’t posted a net margin higher than 31% in the last 32 years.
Top robotics and automation companies worldwide continued to deliver excellent revenue and earnings growth in 2Q23. However, after four consecutive quarters of positive earnings, strong demand and record backlogs will surprise, the tone changed as several bellwether companies warned of a slowdown in orders and lowered full-year outlooks.
The slowdown in orders in factory automation was most noticeable in:
- Rockwell Automation, the US leader in factory automation control systems, which had an exceptionally strong 1Q23 result, reduced its year-end backlog and lowered its top organic growth measure. While management remains optimistic Large number of new manufacturing plants starting up in the US, Rockwell noted increased disruptions in China and e-commerce customers and warned of a slowdown in orders from machine manufacturers
- A fan, the world leader in industrial robotics, reported a surprising 35% drop in operating profit and cut its full-year outlook more than 30% below consensus. Orders fell 24% year over year as customer inventories normalized. Fanuc said that with stabilized supply chains, industry-wide inventory adjustments are likely to continue through the rest of the year.
- SiemensEuropean industrial automation powerhouse, lowered its 2023 revenue outlook for Digital Industries following a -35% year-over-year drop in orders in 2Q, while expecting the trend of more intense destocking to continue over the next few quarters.
- ABBthe European leader in factory robotics, also reported a worse-than-expected decline in Robotics and Discrete Automation orders (-23% year-on-year)
While industrial automation looks set to slow further over the next few quarters, the ROBO Index’s overall fundamentals remain strong.
87% of the 79 members of the ROBO Global Robotics & Automation Index have now reported earnings for 2Q23, and average revenue growth is 9.5%, well above the S&P500’s 0.6%, according to Factset. Meanwhile, median EPS growth accelerated to 12.1% year-over-year, from 5.3% year-over-year in the previous quarter. That compares to a -5.2% decline in EPS for the S&P500, the biggest decline in earnings since 3Q20, according to Factset.
These results were somewhat better than expected, with a median surprise per share of +3%, but not as positive as in previous quarters. In fact, only 54% of index members reported EPS growth in 2Q20 compared to 70% in 1Q23 and 61% in 4Q22.
More than half of the ROBO Index members reported double-digit revenue growth, led by business process automation (ServiceNow, PTC) as well as logistics and warehouse automation, with Symbotic, Kardex, Cargotec, Manhattan Associates and Toyota Industries reporting growth of more than 23%. Symbotic has announced a flurry of new contracts and a new JV with Softbank to create an automated warehouse services company that it expects to generate more than $500 million annually in recurring revenue from software, parts and services by 2030.
The Integration and Sensing subsectors also posted healthy double-digit revenue growth. Meanwhile, sales declines were concentrated in 3D printing and semiconductors, where the decline that began in 2022 continued, with Ambarella, Qualcomm, Teradyne and Fuji reporting declines of more than 15%.
As of August 31, 2023, the ROBO Index is up 18.3% YTD and trades on an aggregate forward PE of 25x, compared to a 24x average over the nearly 10 years since inception and a February 2021 high of 36x.
