Are we navigating by the stars under cloudy skies? This year’s equity market trading has certainly been characterized by much trepidation as the market struggles to find its true north. Yet, for all the mental scar tissue around what could go wrong, it has been remarkable to see how much has gone right. Not only has economic growth remained relatively robust amidst inflation abating, but consumer spending and corporate margins have also sustained at healthy levels. Yes, it seems like the skies have at times been cloudy, but when will this market let go of the concern that every cloud may bring thunderous rain?
For the month of August, U.S. equities finished lower as the S&P 500 and Nasdaq-100 Indices posted their first monthly declines since February. The ROBO indices saw similar weakness with the Robotics & Automation Index (ROBO) declining -7.6%, the Healthcare Technology & Innovation Index (HTEC) contracting -7.2% and the Artificial Intelligence Index (THNQ) falling -4.9%. While AI is still a major growth topic here, the Nasdaq 100 (heavily weighted in the tech space and thus the AI discussion) declined 1.5% for the month yet is still up over 42% YTD.
The upcoming long weekend in the US certainly offers a nice opportunity to take a step back from markets and prepare for the sprint into year-end. As we all sharpen our pencils, the question remains what grade will this market get next semester? At home, it feels like the chorus of “soft landing” has been growing louder as we continue to get Goldilocks data prints. Of course, the beginning of this week saw some resurgence of the “bad news is good news” narrative amidst soft economic data.
Investors have certainly had a lot to mull over these last few months as we all continue to assess the trajectory of financial conditions. Nevertheless, what is most encouraging is that inflation has been moderating without hampering global growth. The consumer remains strong – particularly in the US – and ironically it seems like risks to the upside have become more likely than a potential slowdown.
All eyes turned to Nvidia (NVDA) last week – the rising AI star that just keeps getting brighter. By the time the fiscal year ends next January, Nvidia should have brought in north of $50 billion in revenue, nearly double that of last fiscal year and nearly 5 times its annual revenue in fiscal 2020.
The surge is flowing through to Nvidia’s bottom line. Its net profit margin hit 46% in the quarter, compared with 10% in the year-earlier quarter. Just as a comparison, Intel hasn’t reported a net margin higher than 31% in the past 32 years.
Best-in-class robotics & automation companies around the world continued to deliver superior revenue and earnings growth in 2Q23. However, after four consecutive quarters of positive earnings surprises, strong demand and record-high backlogs, the tone has changed as several bellwether companies warned of slowing orders and reduced full-year outlooks.
Slowing orders in factory automation were most apparent at:
- Rockwell Automation, the US leader in factory automation control systems, which had an exceptionally strong 1Q23, trimmed its year-end backlog and lowered the high end of organic growth guidance. While management remains upbeat around the large number of new manufacturing facilities launching in the US, Rockwell saw increased cancellations in China and with e-commerce customers and warned of slowing orders from machine builders
- Fanuc, the world’s leader in industrial robotics, reported a surprising 35% decline in operating profit, and lowered full-year guidance by more than 30% below consensus. Orders fell 24% YoY as customer inventories normalized. Fanuc said that with supply chains stabilized, inventory adjustments across the industry will likely continue through the remainder of the year.
- Siemens, the European industrial automation powerhouse, lowered its 2023 sales outlook for Digital Industries after a -35% YoY slump in 2Q orders, expecting intensified destocking trends to continue for the next few quarters.
- ABB, the European leader in factory robotics, also reported worse-than-expected declines in orders Robotics and Discrete Automation (-23% YoY)
While industrial automation looks set to slow further in the next couple of quarters, overall fundamentals for the ROBO index remain strong.
87% of the 79 ROBO Global Robotics & Automation Index members have now reported 2Q23 earnings, and the median revenue growth stands at 9.5%, significantly above the 0.6% rate for the S&P500 according to Factset. Meanwhile, median EPS growth accelerated to 12.1% YoY, up from 5.3% YoY in the prior quarter. This compares to a -5.2% EPS decline for the S&P500, the largest earnings decline since 3Q20 according to Factset.
These results were somewhat better than expected with a median EPS surprise of +3%, but not as positive as in prior quarters. In fact, only 54% of index members reported EPS beats in 2Q, compared with 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 all reporting more than 23% growth. Symbotic announced a flurry of new contracts and a new JV with Softbank to create an automated warehouse services company, which it expects to generate over $500m in annual recurring software, parts and services revenue by 2030.
The Integration and Sensing subsectors also showed healthy double-digit revenue growth. Meanwhile, revenue declines were concentrated in 3D Printing and semiconductors, where the downcycle started in 2022 continued to play out with Ambarella, Qualcomm, Teradyne and Fuji reporting declines of more than 15%.
As of August 31, 2023, the ROBO index was up 18.3% YTD and is trading on an aggregate forward PE of 25x, compared with the 24x average during the nearly 10 years since inception, and a high of 36x in February 2021.
