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Why robotics makes sense for value investors

Why robotics makes sense for value investors

Eric Siegloff

Investors stand to benefit from the robotics thematic as the world transitions towards more resource-efficient activities, writes Nanuk Asset Management's Eric Siegloff.

Eric Siegloff

We’re seeing robots move from industrial applications to consumer applications in our homes. We’re seeing strong trend growth at a global level for both these end markets.

We’re seeing greater sophistication and application of technologies. And we’re seeing sharp declines in the cost of making robots, leading to rising affordability and a prospective virtuous circle of demand and production.

Robots are becoming cheaper, faster, safer, smarter, more applicable and nimble day by day. This is attractive to us as fundamental investors.

The investment challenge is to find the right companies in the right area at the right time, and to benefit from the robotics thematic as it plays its part in the global transition towards a ‘new world’ of more environmentally sustainable and resource-efficient activities in the decades to come.

Where does robotics fit as an investment?

Robotics has become a familiar investment theme, both in specialised funds or an asset in more diversified funds such as the Nanuk New World Fund which is exposed to a broad theme of environmental sustainability and resource efficiency.

At a portfolio level, robotics fits within the industrial efficiency sector.

At the industry level, there are three broad themes for consideration:

  1. Robotics is experiencing strong structural growth, a prospective good source of investment opportunity.
  2. The focus is both narrow (traditional industrial robots) and wide (new technologies such as cobots, coupled with a larger range of emerging applications growing even faster).
  3. These emerging applications are having a more direct impact on people’s everyday lives, moving beyond the factory and into the home.

Medical robotics is a key application seeing tremendous growth. Intuitive Surgical is a US company that pioneered medical robotics in 1995 for minimally invasive surgery.

Its main product, the ‘da Vinci’ Surgical System, has been utilised in a variety of surgeries including urology and gynaecology for over three million patients already.

The product has been amazingly successful in improving patient outcomes and its market share in its core applications is up to 90 per cent.

Although the industry is still quite nascent, new players are joining the medical robotics market such as the joint venture Verb Surgical, a collaboration between Google and Johnson & Johnson.

A virtuous cycle of economies of scale

Robot adoption is underpinned by faster business cycles, more flexible business and service models and more rapid response to customer needs.

New generation robots are more connected, more flexible and more precise.

Key to this is the development of artificial intelligence and machine vision, which is allowing machines to navigate physical space and adapt to non-standard objects.

This pushes robots from being limited to a production line and a repeatable action – for instance, attaching a bottle cap – to move around a warehouse, for example.

In late 2017, the International Federation of Robotics forecast that 1.3 million industrial robots will be installed in factories around the world in the three years spanning 2018 to 2020.

This would bring the worldwide stock of industrial robots to 3 million units by 2020. Notably, robot adoption across small and medium enterprises is seen as a developing trend. 

While strong growth in robotics is evident, the cost of components of a robot are rapidly declining, such as the massive drop in the cost of computing power and related core components.

Since 2010, the average robotics sensor cost has dropped by 50 per cent and the cost of lithium-ion batteries has fallen 75 per cent.

Emerging applications such as cobots are growing at double-digit figures. For example, Teradyne, a company that makes automatic test equipment, has seen cobot revenue grow 6.5 times over the last four years.

This growth has been driven by cost competiveness in manufacturing hubs, particularly in China.

As cobots become cheaper, they’re gaining market share, and this enables a virtuous cycle of increased economies of scale.

Robotics as an investment is underpinned by strong trend growth for industrial and consumer applications at a global level, contributing towards a ‘new world’ of more environmentally sustainable and resource-efficient activities in the decades to come.

Eric Siegloff is chief executive officer at Nanuk Asset Management.

 

Why robotics makes sense for value investors
Eric Siegloff
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