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 sturdy over the previous couple of quarters. 5 members of the ROBO International Innovation Indices have obtained takeout presents. On this installment of “Observe the Cash”, we spotlight offers that illustrate the monetary and strategic enchantment of key expertise developments thus far 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. Immediately, we will discuss robotics, AI and healthcare applied sciences with a concentrate on offers and fundings. So, we will probably be each the general public fairness aspect, the place we’ve seen some main shifts within the final six months, in addition to the personal aspect and enterprise capital, and we are going to talk about a number of the key developments that we’re watching. We’ll additionally make certain to avoid wasting time to your questions. As a lot of you recognize, we frequently share a few of our analysis on the roboglobal.com web site and biweekly emails, and we simply printed 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. Immediately, 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 12 months. Our analysis round automation led us to comprehend that one thing essential is occurring 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 Expertise & Innovation Index.

These aren’t your conventional index ETFs or funding methods mix a analysis pushed strategy with the advantages of index investing and the ETF wrapper. The portfolios are choices of finest in school corporations from around the globe, small, mid, large-caps which are roughly equal weighted and rebalanced quarterly. So, they’re diversified with the 60 to 85 holdings, but they’ve a really excessive energetic share and low overlap with broad fairness indexes just like the S&P500. The three methods have outperformed world fairness since inception, as you possibly can see on this desk of index returns as of the tip of April 2022, even after the brutal decline up to now few months. So, why are we speaking about M&A and fund flows? That is essential 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 just a little greater than 80 corporations within the index. We’ll get again to that. However the essential level right here is that we’ve seen a transparent acceleration up to now two years, regardless of the numerous enterprise disruptions throughout the pandemic. In truth, 2021 was a file 12 months for mergers, for acquisitions and enterprise funding. Because the pandemic actually bother charged the digitization of our economic system and left some main scars as we got here out to the opposite aspect. You consider the availability chain disruptions, you consider 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 corporations around the globe. Particularly for these bigger organizations that more and more perceive, they will need to have a presence and capabilities round automation. In lots of instances, they’re behind the curve and they should purchase relatively than construct. They’re able to pay up for high quality companies. Now, this can be a very a lot structural pattern in our view, however the large shift within the monetary markets over the previous six months have clearly modified the dynamics when it comes to capital deployments. In simply six months, we’ve moved from a form of Goldilocks of sturdy financial and revenue development to some of the complicated macro scenario in many years. Now we have warfare in Europe, we’ve oil that is up 75% up to now 12 months, and above $100 a barrel.

Now we have indicators of a slowing consumption simply when the Fed is beginning a price hike cycle. I believe tech is actually the place the motion has been concentrated up to now 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 features of the pandemic being given again, and in some instances, 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. Multiple in 5 shares is down greater than 75%. So, that’s similar to the dot-com crash in 2000, and the FANG shares are down greater than 35% on common 12 months thus far. Our three methods are down between 27% and 34% as of the shut yesterday, so on the Might seventeenth.

Now, that qualifies because the sharpest drawdown we’ve seen since we began ROBO in 2013, and it’s on par with the selloff throughout 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 usually prime quality companies when it comes to their margins, when it comes to their return on capital, and the energy of their steadiness sheets. This chart right here reveals the proportion of corporations with a web 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 steadiness 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 aren’t simply US corporations. You’ll be able to see right here that we’ve greater than 13 nations represented in ROBO, and that a number 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 us take a look at what’s occurring in robotics first, then I will go it on to my colleagues to debate healthcare applied sciences and AI, and we are going to wrap up with what’s occurring on the enterprise capital aspect.

So, this can be a chart of complete 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 a number 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 12 months in robotics index portfolio corporations. The primary one was Vocera which agreed to be acquired by Stryker in January for just 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 essential offers we have been watching over the previous few months. Blue Prism ultimately agreed to a takeover by SS&C, which is a non-public 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 actually software program robots that automate enterprise processes that you’ll find on desktop, computer systems and enterprise techniques. Within the report that you’ll find on the web site, we additionally talk about quite a few essential acquisitions made by ROBO index corporations like Zebra and its buy of Matrox Imaging to push into laptop imaginative and prescient. A deal by Aptiv to spice up its autonomous driving and linked automobiles capabilities by buying Wind River that is a supplier of software program options for, I believe, that was round $4 billion.

So, our view is that regardless of the extra complicated macro backdrop that we’re going through at present, M&A is more likely to stay sturdy 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 lots of the smaller and mid-cap corporations. That’s one thing that I need to conclude with this historic chart of the value earnings ratio for ROBO. You’ll be able to see that the world’s main robotics automation corporations at the moment are 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 isn’t 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 developments 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 Expertise & Innovation Index, this has comprised of 80 or so finest in school healthcare tech corporations that we consider characterize the expansion and disruption over the following 5 to 10 years, that’s undoubtedly occurring as we converse within the healthcare sector. Because it pertains to latest efficiency, proper now, much like a number of the macro themes that Jeremie was discussing, there was a pullback in healthcare tech. It has not been proof against a number of the macro associated pressures, akin to rising rates of interest, issues about inflation, the growing price of debt, clearly. So, it induced a number of buyers to take a pause on some excessive development tech ahead names, significantly, those that won’t be worthwhile or cashflow optimistic but.

However, as you possibly can see on this chart, the ROBO International Healthcare Expertise & Innovation Index HTEC has tended to outperform the broader markets over the long-term. In truth, even in a 3 12 months interval, it nonetheless continues to outperform world equities. Then, if you happen to have a look at a ten 12 months again check, it nonetheless double the efficiency of world equities. So, we’re remaining lengthy and robust on healthcare tech for a lot of causes. I will dive just a little bit deeper into a number of the M&A transactions which have taken place during the last interval. So, let’s examine. Jeremie talked about earlier Vocera as a result of it occurred to be an organization in each ROBO and HTEC. Vocera is a very fascinating 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 present 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. Everyone was shouting, there was noise alerts all over the 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 lately applied Vocera, and it is actually induced 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 precise particular person must be alerted when one thing fascinating has occurred. So, relatively 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 setting whenever you get alarm fatigue.

So, Vocera has a method of re-coordinating this throughout gadgets to verify the fitting particular person on the proper time will get the communication. Whenever you talked about M&A, nicely, what occurred? Stryker acquired them. Stryker is a world chief in orthopedics, neuro, backbone, and this firm made a $3 billion acquisition earlier this 12 months 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 changing into digitized. Healthcare is among the final financial sectors to turn out to be digitized. It is solely not that way back that folks have been nonetheless and possibly nonetheless are filling out paper charts once they go to the physician workplace. So, there’s an enormous alternative for healthcare to proceed to be increasingly more digitized. That’s driving and growing quantity of funding exercise.

The Stryker acquisition of Vocera is only one instance. Think about, Stryker is all over the place. They’re within the ambulance, the whole affected person’s journey, they’re within the emergency room, they’re within the working room. Then upon discharge, Strykers obtained stuff that may observe the affected person to the house. So, now with Vocera, in an integration platform, they’ll combine all of these gadgets and higher regulate 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 more 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 observe the affected person wherever they go. Talking of digitization and decentralization, and on this theme, we noticed one other monster acquisition with Masimo throughout the interval.

Though this one was fairly controversial, when Masimo introduced the acquisition of an organization referred to as Sound United, they misplaced a few third of their market cap that day. The explanation 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 must 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 once they purchased Sound United was a worldwide distribution alternative, an current footprint of people that already favored that firm and use their electronics.

What the market may 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 not likely speaking about that is the chance to actually deliver a hospital at dwelling setting 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 probably one among their screens may set off an occasion and so they may real-time get a nurse or a physician on the telephone by their speaker system and simply say, “Hey, did you fall? Are you okay?” I believe that is revolutionary, and that is the way forward for healthcare. So, after we take into consideration watch and health watches, positive, possibly $1 billion to $2 billion market alternative. After we take into consideration dwelling telehealth gadget, this could possibly 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 setting, though, it’s pressuring shares, it isn’t slowing down funding amongst these corporations. Exterior of digitization, there’s rather a lot occurring additionally within the diagnostics world. I will simply briefly contact base, Quidel announce the acquisition of Ortho Scientific Diagnostics that is anticipated to shut within the coming weeks. That is large, $6 billion. Quidel is a type of corporations that basically confirmed their market expertise management throughout the pandemic, this was the COVID antigen check firm. They actually modified the face of what was occurring within the pandemic and let individuals return to work. However, now that the pandemic is changing 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 drag 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 a number of COVID testing.” However the market was nervous that there was going to be a pullback in income when COVID testing pulled again. However these corporations are so diversified that they offered a number of devices for COVID testing during the last three years. Now, the labs can use their devices to run different exams. So, whereas COVID volumes have come again, they’ve seen an uptick in different exams. Individuals 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 have got a portfolio crammed with market leaders, akin to those which are 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. Hi there 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, 12 months 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 principally 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. At the same time as earnings and prime line majority beat expectations.

For instance, earnings of corporations which have reported thus far are up prime 30% versus the long-term common of 13.7%. So, you may 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’ve long-term views on these developments, however we perceive that individuals 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 automobiles, the metaverse, there’s simply a number of long-term performs right here that we’re enthusiastic about. I will 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 damaging earnings this 12 months. Nearly all of people who’s underneath $8 of damaging earnings. Of these 11, 5 are projected to turn out to be worthwhile within the subsequent two years. So, simply fascinated with our portfolio, we’ve prime quality corporations which have good money balances mentioned earlier which are in excessive development areas. I believe the THNQ index has actually matured and confirmed itself within the face of the pandemic. In truth, 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 changing into increasingly more essential as we undertake these applied sciences throughout eCommerce, healthcare, fintech. So, the thesis round AI permeating into all aspects of society and companies is occurring.

Regardless of any non permanent setbacks and fears like these, these are occurring. So, I am going to enter a few of these different areas like AV and metaverse in a second after 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 aspect, these are the issues that individuals are enthusiastic about of, what’s AI doing? That is the enterprise course of, the patron, the eCommerce, manufacturing facility automation. I believe having publicity to each supplies an amazing upside potential right here, particularly as we have seen simply a number of contraction within the face of optimistic information, principally. Up to now week, we have began to check a rebound in excessive development shares throughout eCommerce and client possibly indicators of being oversold.

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

Shifting on to M&A. So, subsequent slide. Thanks. So, after a file 2021 that promote eight THNQ index members. As a reminder, we’ve 72 in our ETF proper now in our index. Now we have not seen any new takeovers presents thus far in 2022. Since its obsession in 2018, there been 11 member takeouts. So, eight in 2021. Nearly all of these have been personal fairness funds and consortiums taking tech corporations personal, they noticed a price.

So, since our final M&A report in Q3 final 12 months, we have had three takeout presents. So these have been all in This autumn 2021. That features Blue Prism, which has been mentioned earlier on this report. The opposite two have been Aspen Expertise and McAfee. So, Aspen Expertise, 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, now not in a portfolio, however that was an fascinating deal that is sensible for Emerson. On pattern and wrapping up final 12 months’s a number of take personal.

One other THNQ member, McAfee the enterprise safety software program firm that does endpoint detection, community and information safety was taken personal after being public for only one 12 months in November by an investor group comprising of Creation, Permira, Crosspoint Capital, and lots 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 energetic areas of M&A.

So, what’s Microsoft’s acquisition of Activision Blizzard imply for Microsoft and the remainder of the ecosystem? Nicely, a number of that is the concentrate on the metaverse. You might have gaming, which is the apparent story behind Activision. However if you happen to look just a little 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’d not have screens we’re , could possibly 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 how you can design nice person expertise, interactive design, and actually debug complicated interactive environments is nice for them as they give the impression of being to broaden 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 fascinating.

Whenever you consider metaverse, it is a buzzword, initially. However second of all, it is actual. If you consider their merchandise like LinkedIn, Home windows, Groups, these different issues, they’re all centered on moving into this immersive setting. Loads of that’s going to require a lot of information, a lot of cloud infrastructure funding. Should you’re having a simulation of their digital world in the actual world, and that is all being overlaid speaking real-time, that is a number of infrastructure and communication expertise. So, I believe 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 a number of AI to detect if you’re who you might be. Should you had intent to entry what you are attempting to do, requires cybersecurity and THNQ index member. Alphabet 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 primary want for these corporations, nevertheless it’s a aggressive moat, actually, to make sure that their prospects, whether or not it is you and I, or enterprise prospects 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 publicity to the businesses akin to Rapid7, Cloudflare, Varonis and Darktrace. So, with that, I’ll go it on to Jeremie.

 

Jeremie Capron:

Thanks, Zeno. The very last thing we need to contact on at present is the personal aspect enterprise capital funding. Earlier than I do this, I need to remind all people, you possibly can ask you questions utilizing the Q&A field on the backside. So, on the personal aspect, I believe, the one line abstract is that we had a file breaking 12 months in 2021, and the speedy 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 sturdy and it is occurring at considerably decrease valuations. I believe it is essential to know that on the extent of the growth in 2021, we offered greater than $640 billion invested. That was a file excessive and nearly a doubling 12 months over 12 months. Two thirds of those funds went to late-stage development corporations with very giant rounds pushed by monetary establishments, together with hedge funds, attempting to find pre-IPO corporations.

I believe that is the place a number of this exercise is slowed in thus far this 12 months. Within the meantime, we noticed early stage funding that was additionally very sturdy final 12 months, however possibly not as excessive as late-stage. When it comes to 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 12 months, we see that funding is steadily declined by nearly 20% with the shock within the public fairness markets. The variety of offers, nonetheless, continues to be up 12 months over 12 months, and with so sturdy 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 sturdy within the areas of automation, particularly options that assist with the availability chain points and the label shortages. With decrease valuations, we see a positive outlook for early stage investing. Now, lastly, this is a brief checklist of a number of the latest offers that we’re watching carefully as they contact on our areas of focus. These corporations will doubtless come onto your radar as they ultimately 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 trade, the logistics trade, the development trade and others. What they do is they assist corporations accumulate and handle information, together with tools monitoring, telematics, or how vehicles and fleets of automobiles transfer round, and so they do video analytics utilizing AI and a few extra.

So, Samsara went public on the $12 billion valuation. In just below six month, its share at the moment are buying and selling about 50% under the IPO value. Now, one other one is Exotec. Exotec is a warehouse robotics firm that is based mostly in France. I am sorry. They raised $300 million at a $2 billion valuation, that was at first of the 12 months in January. Exotec makes the Skypod System that may 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 scientific analysis in healthcare. In addition they elevate greater than $300 million round $2 billion valuation. What Medable does is that this straightforward to make use of software program that connects sufferers and scientific groups and scientific trial websites to allow scientific trials anyplace. So, that is a giant change for the trade that ought to assist the growth in scientific trials we’re seeing at present with the enlargement 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 allows this to occur. We expect that is going to vary dramatically the way in which scientific trials are carried out going ahead. A lot of the firm’s success has been pushed partly 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’ve just a few within the queue already. I believe we’ll begin with query round earnings projections, and revisions for the ROBO and in addition HTEC indexes. I believe that is a very essential 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 truth, valuations have contracted by nearly 35% from the excessive. Within the meantime, earnings projections, earnings estimates have barely moved, and we’re coming to the tip of this Q1 incomes season. If we have a look at the three month earnings revisions, so modifications in road estimates over the previous three months, what we see is that they’ve actually barely moved. So, after I have a look at ROBO first over the previous three months, the projected EPS for this 12 months has come down by 1.5%.

After all, it is a mixture of the higher of surprising outcomes that we noticed general in Q1. As you recognize, that occurs more often than not in public equities, the place corporations are available 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 scale back their outlook considerably or preserve it. In some instances, scale back it, however in combination 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 12 months projections, it is the identical story.

Now we have a 1.8% discount within the EPS estimate for subsequent 12 months. So, after all, something may occur, and the noise round the opportunity of a recession has elevated. Clearly, we’ve power costs going by the roof, and traditionally that has tended to result in a extra of a recessionary setting, however that is on the identical time, we’ve a really sturdy momentum within the economic system at present. Whenever you have a look at the gathered financial savings throughout the previous two years, and also you have a look at the patron spending patterns, client spending is sustained to extend month over month for the 4 consecutive month. The most recent information level that got here out only a few days in the past was displaying extra of that with April retail gross sales up month of the month.

On the economic aspect, you have a look at the economic manufacturing numbers, they’re nonetheless displaying development and so they’re coming in higher than anticipated. So, I believe, after all, we’ve to be aware that we may flip into extra of a recessionary setting, 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 stream 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 observe of the money stream healthiness and the money scenario of the portfolio. As we talked about earlier, nearly all of the businesses and the portfolio are web money optimistic. However after we have a look at free money stream, there are fairly just a few that proceed to be money stream damaging 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 steadiness 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 12 months or two, and that is out of about 85 names. So, when it comes to the p.c about on the excessive finish, about 8% may probably 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 are investing closely into their R&D, their scientific 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, probably in September, October timeframe on one of many largest ever scientific trials occurring within the genomics discipline. They’re evaluating to see whether or not or not you possibly can draw blood. So, that check is named liquid biopsy with the blood draw, a routine blood draw that you just get at your regular physician appointment to display for colorectal most cancers. The explanation why this could be revolutionary is as a result of, proper now, the display course of for colorectal most cancers is just a little bit extra tedious both by colonoscopy or by stool assortment at dwelling that you’d mail in. So, when you’re having a routine blood draw, have them tack on a check probably for colorectal most cancers display. 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 varieties of most cancers.

There are a number 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 a number of M&A individuals going after this expertise validating its market alternative. So, anyway, I deliver up Guardant as a result of they’re one among these corporations that will probably want to lift within the subsequent couple years, however they’re engaged on one thing revolutionary, and early information is definitely displaying that this could possibly be fairly promising.

 

Jeremie Capron:

Thanks, Nina. Possibly you possibly can remind us the proportion of HTEC corporations which are worthwhile or money stream optimistic, which I consider is the overwhelming majority of what is within the portfolio. What kind of corporations are usually loss making at present with expectations of future earnings when it comes to what sort of work they do?

 

Nina Deka:

Yeah. So, a few third of the corporate has damaging earnings, and a few quarter of the corporate as of calendar 12 months 2022 is money stream damaging. So, once more, these are largely comprised of possibly 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 a number of corporations which are 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 so on. So, a number 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 few quarter are cashflow damaging this 12 months.

A lot of them are on observe to money stream break even. For instance, Natera, one of many corporations I discussed. Should you have a look at their money steadiness, merely $1 billion, however a excessive money burn price, nonetheless, they proceed to have an bettering reimbursement setting. They maintain getting authorization from the facilities for Medicare and Medicaid that extra of their testing goes to be reimbursable. So, what this implies is exams that they’ve already been doing and never producing a number of income on are going to generate extra income. Loads of that’s going to proceed to drop to the underside line. So, a number of proper issues should occur, however ought to this firm execute on plan? They might truly flip money stream break even within the subsequent couple years. Does that reply your query, Jeremie? Or did you have got 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 when it comes to avoiding unprofitable or excessive P/E corporations? That is a great query. I might 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 truth, we’ve an embedded mechanism within the index building course of that ensures that each quarter, we rebalance. So, each three month, we find yourself promoting corporations which have seen their share value transfer up essentially the most, and we purchase people who have come down essentially the most, so long as, after all, they nonetheless qualify for the index, and we primarily assume they’re nice long-term investments. So, you have got that smoothing or danger administration mechanism that is embedded in our course of.

However I might say that, basically, once more, we do not discover a number 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 instances, extraordinarily worthwhile. These corporations have a tendency to attain very excessive on the standard issue. They’ve truth margins and excessive return on capital. It is just a little completely different in AI, and Zeno talked about that we’ve 11 out of 72 members within the AI portfolio which are misplaced making, so it is just a little extra. In healthcare applied sciences, it is much more, simply round 30%. However, once more, robotics automation, it is stomach any. Now, when it comes to the excessive P/Es, that is a great query, and I believe you will discover it stunning that, the truth is, we’ve extra corporations in ROBO which are buying and selling on very low multiples than we’ve corporations which are buying and selling on excessive multiples.

The metric I will use right here is that gross sales a number of, the EV-to-sales the place we’ve about 10 corporations or so. In ROBO, they’ve a double digit EV-to-sales a number of, so each 10X, which one may qualify as costly. However we’ve greater than a dozen which are buying and selling under one instances EV-to-sales, and that’s outstanding. These corporations are usually concerned in industrial finish markets. There is a good member of Japanese manufacturing facility 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 may deteriorate within the China market.

General, our view is that the perfect time to put money into applied sciences when the valuations are low. If in case you have an extended sufficient time horizon, this can be a excellent recipe. So, yet another query across the M&A market. I believe, Zeno, you possibly can take a shot at that. How can we see the general public market de-rating impacting the M&A market? Is {that a} maintain or only a non permanent correction?

 

Zeno Mercer:

Yeah. There’s positively a correlation with M&A exercise and the re de-rating and the general public fairness market sentiment. Regardless of what induced analysis, contraction corporations are evaluating their strategic strikes. On the opposite aspect, you have got corporations which have giant catch steadiness sheets which are nonetheless capable of make acquisitions throughout this time that they’ll make $10 billion acquisitions for a few of these corporations and that would not affect them that a lot. Now, they may wait, they may 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 greater ones. These are long-term strategic performs which are elementary to the corporate.

On the opposite aspect, since you may be seeing much less inventory compensated buyouts as a result of they’re at depressed inventory valuation, in order that they’d relatively be shopping for again their inventory than promoting an organization with depressed firm shares. So, there’s truly an impetus that you just may see with all the company VC that is occurred. Company VC is at its peak, it may keep and continue to grow, however there’s so many strategic acquisitions which were blade on the market that you just truly may see a number of money steadiness sheet acquisitions for these AI and robotics and different corporations as a consequence of 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’re going to purchase it. So, if we’re at zero now, comparatively, the one method we will go is up from right here.

However, I believe that is the place we’re at, sentiment form of improves. Nicely, these corporations, aren’t evaluating M&A alternatives. With Ukraine and simply China provide chain, I believe there’s simply been a pair issues that folks have been cautious about. However, in any other case, I believe that is only a core a part of enterprise and there are a number of acquisitions final 12 months. So, a short lived pause simply to combine a few of these M&A acquisitions additionally make sense. So, there’s quite a few components there, however I do assume it’s going to ramp up small mid-cap after which giant corporations with steadiness sheets could make strikes regardless.

 

Jeremie Capron:

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



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