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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 affords. On this installment of “Comply with the Cash”, we spotlight offers that illustrate the monetary and strategic attraction of key expertise traits up to now in 2022.

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Jeremie Capron:

My identify 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 workforce, Nina Deka and Zeno Mercer. In the present day, we will discuss robotics, AI and healthcare applied sciences with a give attention to offers and fundings. So, we might be taking a look at each the general public fairness facet, the place we’ve seen some main shifts within the final six months, in addition to the non-public facet and enterprise capital, and we’ll focus on a number of the key traits that we’re watching. We’ll additionally be certain to avoid wasting time in your questions. As lots of , we often 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 masking right now’s presentation. So, be at liberty 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 targeted on robotics, AI and healthcare applied sciences, and we designed thematic funding methods round what we consider to be a technological revolution. In the present day, there’s over $3 billion in funds monitoring our methods, they’re primarily ETFs. Probably 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 understand that one thing necessary is occurring in two particular areas. So, within the final 4 years, we launched two extra 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 will not be 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 choices of greatest in school corporations from world wide, 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 energetic share and low overlap with broad fairness indexes just like the S&P500. The three methods have outperformed international fairness since inception, as you’ll be able to 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 a little bit greater than 80 corporations within the index. We’ll get again to that. However the necessary level right here is that we’ve seen a transparent acceleration previously two years, regardless of the numerous enterprise disruptions through the pandemic. Actually, 2021 was a document yr 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 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 corporations world wide. Particularly for these bigger organizations that more and more perceive, they should have a presence and capabilities round automation. In lots of instances, they’re behind the curve and they should purchase fairly 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 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 sort of Goldilocks of sturdy financial and revenue progress to one of the vital advanced macro state of affairs in a long time. Now we have warfare in Europe, we’ve 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 charge hike cycle. I feel tech is admittedly 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 basically the features of the pandemic being given again, and in some instances, some extra. It is not solely the Zoom and Peloton and Robin Hood, the truth is, practically half of the NASDAQ shares are down 50% or extra right now from the excessive. A couple of 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 yr up to now. 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 through the COVID lockdown panic. Now, the excellent news is that in evaluate, 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 when it comes to their margins, when it comes to their return on capital, and the energy of their stability sheets. This chart right here exhibits 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 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 subsequent slide that the businesses we’re speaking about right here, they don’t seem to be simply US corporations. You may see right here that we’ve greater than 13 international locations represented in ROBO, and that lots 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 will not be represented within the S&P500 or international 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 taking place in robotics first, then I am going to move 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 may see the names of the businesses which have obtained a takeover provide over the previous 5 years. As I mentioned 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 may see lots 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 let you know 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 subsequent slide, please. You have got 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 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 will discover on desktop, computer systems and enterprise techniques. Within the report that you will discover on the web site, we additionally focus on a lot of 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 advanced macro backdrop that we’re going through right now, M&A is more likely to stay sturdy in robotics automation. That is as a result of the current market selloff is presenting engaging alternatives, and acquirers have the monetary capability to amass lots 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 may see that the world’s main robotics automation corporations are actually buying and selling on about 22X earnings, which is beneath the historic common of 24X. That it additionally beneath 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 might be superior earnings’ progress over the long-term. So, I’ll depart you with that and ask Nina to hitch us and focus on traits in healthcare applied sciences.

 

Nina Deka:

Thanks, Jeremie. Hello, Nina Deka right here. Thanks for taking the time right now 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 characterize the expansion and disruption over the subsequent 5 to 10 years, that’s undoubtedly taking place as we communicate within the healthcare sector. Because it pertains to current efficiency, proper now, just like lots of the macro themes that Jeremie was discussing, there was a pullback in healthcare tech. It has not been proof against lots of the macro associated pressures, akin to rising rates of interest, considerations about inflation, the rising value of debt, clearly. So, it brought on lots of buyers to take a pause on some excessive progress tech ahead names, notably, those that won’t be worthwhile or cashflow constructive but.

However, as you’ll be able to see on this chart, the ROBO International Healthcare Know-how & Innovation Index HTEC has tended to outperform the broader markets over the long-term. Actually, even in a 3 yr interval, it nonetheless continues to outperform international equities. Then, should you have a look at a ten yr again take a look at, 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 a little bit 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 very fascinating communications’ supplier with a big presence in healthcare. This can be a expertise that you could be not have observed, and the explanation 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 all places. Few years later, I went into this emergency room and all the things was quiet. I requested one of many nurses there, “What is going on on? Why is everybody whispering?” She mentioned, “Properly, we not too long ago carried out Vocera, and it is actually brought on a streamlining of all of our operations. We have been in a position to 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, fairly 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 while you get alarm fatigue.

So, Vocera has a approach of re-coordinating this throughout units to ensure the correct particular person on the proper time will get the communication. While 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 yr to amass this communication platform. So, that is consistent with to Jeremie’s level, how we do anticipate to proceed to see M&A. That is consistent with healthcare tech more and more turning into digitized. Healthcare is without doubt one of the final financial sectors to turn out to be digitized. It is solely not that way back that individuals had been nonetheless and perhaps 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 an increasing number of digitized. That’s driving and rising quantity of funding exercise.

The Stryker acquisition of Vocera is only one instance. Think about, Stryker is in all places. They’re within the ambulance, your entire affected person’s journey, they’re within the emergency room, they’re within the working room. Then upon discharge, Strykers acquired stuff that may observe the affected person to the house. So, now with Vocera, in an integration platform, they’ll combine all of these units and higher regulate the affected person, wherever the affected person is. So, once we take into consideration healthcare in long-term issues, we consider decentralization like an rising quantity of care exterior of the partitions of the hospital, and an increasing number of 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 units observe the affected person wherever they go. Talking of digitization and decentralization, and on this theme, we noticed one other monster acquisition with Masimo through the interval.

Though this one was fairly controversial, when Masimo introduced the acquisition of an organization known 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 have to personal audio system? Properly, what Masimo mentioned they acquired was a world 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 world distribution alternative, an present footprint of people that already appreciated that firm and use their electronics.

What the market is perhaps lacking although on this acquisition is that Sound United additionally has a house working system. This can be 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 essentially carry 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 in all their displays might set off an occasion and so they might real-time get a nurse or a physician on the telephone via 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, once we take into consideration watch and health watches, certain, perhaps $1 billion to $2 billion market alternative. Once we take into consideration dwelling telehealth machine, 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 setting, though, it’s pressuring shares, it isn’t slowing down funding amongst these corporations. Exterior of digitization, there’s so much 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 large, $6 billion. Quidel is a type of corporations that basically confirmed their market expertise management through the pandemic, this was the COVID antigen take a look at 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 so much, and so has their COVID testing quantity. Pairing up with an organization like Ortho is admittedly 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 lots of COVID testing.” However the market was apprehensive that there was going to be a pullback in income when COVID testing pulled again. However these corporations are so diversified that they offered lots 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. Individuals are going to the physician for different issues now. So, we’re actually completely happy to see this stage of diversification, and that is what you get when you have got 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. Good day everybody. My identify is Zeno Mercer, and I will be discussing the THNQ index and technique and M&A right now. I’ll nip the bud. I noticed a query round efficiency. So, yr to day efficiency as of right now 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 up to now are up prime 30% versus the long-term common of 13.7%. So, you is perhaps asking, why is THNQ performing so badly? A few of that’s apparent, international macro conflicts, inflation, simply normal concern. In our opinion, that is fairly shortsighted that is why we’ve long-term views on these traits, however we perceive that persons are scared and that is simply how issues are. However taking a look at 2022, which nonetheless sees progress 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 lots 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 detrimental earnings this yr. Nearly all of those who’s beneath $8 of detrimental earnings. Of these 11, 5 are projected to turn out to be worthwhile within the subsequent two years. So, simply desirous about our portfolio, we’ve top quality corporations which have good money balances mentioned earlier which can be in excessive progress areas. I feel the THNQ index has actually matured and confirmed itself within the face of the pandemic. Actually, it is thrived within the pandemic and what is going on on on the planet. The adoption of the digitization of all the things, we have cybersecurity turning into an increasing number of necessary as we undertake these applied sciences throughout eCommerce, healthcare, fintech. So, the thesis round AI permeating into all sides of society and companies is occurring.

Regardless of any momentary 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 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 facet, these are the issues that persons are enthusiastic about of, what’s AI doing? That is the enterprise course of, the patron, the eCommerce, manufacturing unit automation. I feel having publicity to each gives an important upside potential right here, particularly as we have seen simply a number of contraction within the face of constructive information, principally. Prior to now week, we have began to check a rebound in excessive progress shares throughout eCommerce and client perhaps 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 indications of shedding controls over the expertise companies. We’re additionally seeing de-listing fears proceed to fade. So, lots of funds acquired out of that, and so you would see massive inflows in constructive 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’ve 72 in our ETF proper now in our index. Now we have not seen any new takeovers affords up to now in 2022. Since its obsession in 2018, there been 11 member takeouts. So, eight in 2021. Nearly all of these had been non-public fairness funds and consortiums taking tech corporations non-public, they noticed a worth.

So, since our final M&A report in Q3 final yr, we have had three takeout affords. So these had been all in This fall 2021. That features Blue Prism, which has been mentioned earlier on this report. The opposite two had been Aspen Know-how and McAfee. So, Aspen Know-how, which is a world 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 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 factitious 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? Properly, lots of that is the give attention to the metaverse. You have got gaming, which is the plain story behind Activision. However should you look a little bit deeper, the core parts 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. Finally, 10 years from now, 20 years from now, we’d not have screens we’re taking a look at, might be overlaid in AI and augmented actuality on our faces, contact lenses or glasses. Microsoft realizes this and so they need the most effective expertise doable. So, a gaming firm that is aware of learn how to design nice person expertise, interactive design, and actually debug advanced 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 fascinating.

While you consider metaverse, it is a buzzword, to start 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 targeted on entering into this immersive setting. Quite a lot of that’s going to require numerous information, numerous cloud infrastructure funding. In case you’re having a simulation of their digital world in the actual world, and that is all being overlaid speaking real-time, that is lots of infrastructure and communication expertise. So, I feel it is actually thrilling to see Microsoft on the planet heading into this route.

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 lots of AI to detect in case you are who you might be. In case you had intent to entry what you are making an attempt to do, requires cybersecurity and THNQ index member. Alphabet not too long ago 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, but it surely’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 in a position to proceed working throughout more and more advanced environments. So, the THNQ index captures a number of direct cybersecurity, AI angles via publicity to the businesses akin to Rapid7, Cloudflare, Varonis and Darktrace. So, with that, I’ll move it on to Jeremie.

 

Jeremie Capron:

Thanks, Zeno. The very last thing we need to contact on right now is the non-public facet enterprise capital funding. Earlier than I try this, I need to remind everyone, you’ll be able to 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 admittedly put a damper on public exits by way of IPOs and notably specs which have just about disappeared. The funding exercise continues to be sturdy 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 offered greater than $640 billion invested. That was a document excessive and nearly a doubling yr over yr. Two thirds of those funds went to late-stage progress corporations with very massive rounds pushed by monetary establishments, together with hedge funds, looking for pre-IPO corporations.

I feel that is the place lots of this exercise is slowed in up to now this yr. Within the meantime, we noticed early stage funding that was additionally very sturdy 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, trying on the first quarter of this yr, we see that funding is steadily declined by nearly 20% with the shock within the public fairness markets. The variety of offers, nevertheless, continues to be up yr over yr, and with so sturdy exercise in cybersecurity, in logistics automation, and healthcare applied sciences. We anticipate 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 good outlook for early stage investing. Now, lastly, here is a brief record of a number of the current offers that we’re watching intently as they contact on our areas of focus. These corporations will probably 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 trade, the logistics trade, the development trade and others. What they do is they assist corporations gather and handle information, together with tools monitoring, telematics, or how vans 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% beneath 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 the start of the yr 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 right now 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 trade that ought to help the increase in medical trials we’re seeing right now with the enlargement of precision medication and genomics specifically and gene-based therapies. So, right now, 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 predict 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 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 feel we’ll begin with query round earnings projections, and revisions for the ROBO and likewise HTEC indexes. I feel that is a very necessary level as a result of that 30% or so decline within the ROBO and HTEC index is admittedly all about a number of, all about valuations. Actually, 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 top of this Q1 incomes season. If we have a look at the three month earnings revisions, so adjustments 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 yr has come down by 1.5%.

In fact, it is a mixture of the higher of sudden outcomes that we noticed general in Q1. As , that occurs more often than not in public equities, the place corporations are available in and beat estimates and so they attempt and ensure they do not information too excessive. So, we have seen a standard charge of beating estimates. On the similar time, administration groups have clearly turned much more cautious given the adjustments within the macro backdrop. So, they’ve tended to cut back their outlook considerably or keep it. In some instances, scale 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, after all, something might occur, and the noise round the potential of a recession has elevated. Clearly, we’ve vitality costs going via the roof, and traditionally that has tended to result in a extra of a recessionary setting, however that is on the similar time, we’ve a really sturdy momentum within the economic system right now. While you have a look at the amassed financial savings through 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 newest information level that got here out just some days in the past was displaying extra of that with April retail gross sales up month of the month.

On the commercial facet, you have a look at the commercial manufacturing numbers, they’re nonetheless displaying progress and so they’re coming in higher than anticipated. So, I feel, after all, we’ve to be conscious that we might 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 subsequent 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 progress over the subsequent few years? So, Nina, do you need to take this?

 

Nina Deka:

Yeah, certain. So, we carried out an evaluation simply to maintain monitor of the money stream healthiness and the money state of affairs of the portfolio. As we talked about earlier, nearly all of the businesses and the portfolio are web money constructive. However once we have a look at free money stream, there are fairly just a few that proceed to be money stream detrimental as a result of these corporations are largely investing of their progress in innovation. However once we drill down additional and we have a look at money stability in comparison with the money burn, what we’re discovering is just 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, when it comes to the p.c about on the excessive finish, about 8% might probably want extra financing. So, once 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 applications 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 medical trials taking place within the genomics area. They’re evaluating to see whether or not or not you’ll be able to draw blood. So, that take a look at 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 might be revolutionary is as a result of, proper now, the display course of for colorectal most cancers is a little bit bit extra tedious both via colonoscopy or via stool assortment at dwelling that you’d mail in. So, when you’re having a routine blood draw, have them tack on a take a look at 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 lots 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 price of M&A. Illumina acquired Grail. There’s simply lots of M&A individuals going after this expertise validating its market alternative. So, anyway, I carry up Guardant as a result of they’re one in all 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 might be fairly promising.

 

Jeremie Capron:

Thanks, Nina. Perhaps you’ll be able to remind us the proportion of HTEC corporations which can be worthwhile or money stream constructive, which I consider is the overwhelming majority of what is within the portfolio. What kind of corporations are typically loss making right now 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 detrimental earnings, and a few quarter of the corporate as of calendar yr 2022 is money stream detrimental. 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 lots 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 secure corporations with constructive earnings, corporations like Edwards Lifesciences, Boston Scientific, and so on. So, lots of actual secure worth oriented names within the portfolio, however it’s diversified and it does comprise 49% small mid-cap. Of these, like I mentioned, a few quarter are cashflow detrimental this yr.

A lot of them are on monitor to money stream break even. For instance, Natera, one of many corporations I discussed. In case you have a look at their money stability, merely $1 billion, however a excessive money burn charge, nevertheless, 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 assessments that they’ve already been doing and never producing lots of income on are going to generate extra income. Quite a lot of that’s going to proceed to drop to the underside line. So, lots of proper issues need to 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 an excellent 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. Actually, 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 worth transfer up essentially the most, and we purchase those who have come down essentially the most, so long as, after all, they nonetheless qualify for the index, and we basically 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’d say that, on the whole, once more, we do not discover lots of unprofitable corporations in our thematic index portfolios. On the subject of 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 reality margins and excessive return on capital. It is a little bit totally different in AI, and Zeno talked about that we’ve 11 out of 72 members within the AI portfolio which can be misplaced making, so it is a little bit 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 an excellent query, and I feel you will discover it stunning that, the truth is, we’ve extra corporations in ROBO which can be buying and selling on very low multiples than we’ve 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’ve 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’ve greater than a dozen which can be buying and selling beneath one instances 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 state of affairs that has severely impacted the availability chains and the commercial finish markets. That is in all probability why these corporations are buying and selling at comparatively distressed ranges proper now, for concern that the state of affairs might deteriorate within the China market.

General, our view is that the most effective time to spend money on applied sciences when the valuations are low. You probably have a protracted sufficient time horizon, it is a excellent recipe. So, yet another query across the M&A market. I feel, Zeno, you would 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 momentary 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 on analysis, contraction corporations are evaluating their strategic strikes. On the opposite facet, you have got corporations which have massive catch stability sheets which can be nonetheless in a position to make acquisitions throughout this time that they’ll make $10 billion acquisitions for a few of these corporations and that would not impression them that a lot. Now, they may wait, they is perhaps 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 basic to the corporate.

On the opposite facet, since you is perhaps seeing much less inventory compensated buyouts as a result of they’re at depressed inventory valuation, in order that they’d fairly 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 might keep and continue to grow, however there’s so many strategic acquisitions which have been blade on the market that you just truly may see lots of money stability sheet acquisitions for these AI and robotics and different corporations as a consequence of that strategic implementation. If there’s an organization that may 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 approach we will go is up from right here.

However, I feel that is the place we’re at, sentiment sort of improves. Properly, these corporations, will not be evaluating M&A alternatives. With Ukraine and simply China provide chain, I feel there’s simply been a pair issues that individuals have been cautious about. However, in any other case, I feel that is only a core a part of enterprise and there are lots of acquisitions final yr. So, a brief pause simply to combine a few of these M&A acquisitions additionally make sense. So, there’s a lot of elements there, however I do assume it’s going to 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 right now and be at liberty to achieve out by way of our web site, roboglobal.com if you wish to ask the analysis workforce any query. You can even join biweekly analysis e-newsletter, and we very a lot stay up for talking to you once more quickly. Have an important day. All people bye-bye.



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