By Bill Studebaker, CIO & President, ROBO Global
It was an interesting month for investors—including myself. While ‘straight up and to the right’ would normally put a smile on my face, I am feeling a deep sense of FOMO following the dramatic rise of cryptocurrencies, NFTs, and privates. The experience has me flashing back to the late 90s (during my early years on Wall Street) when we were trading stocks of companies whose names we could barely pronounce and that we knew little about, including how or if they would ever make money. Thankfully, we learn from our mistakes.
Even as I lament not benefitting from the recent market flashpoints, I am more bullish than ever in the future of robotics, AI, and healthcare innovation. Across the markets, the headline numbers at the index level continue to point to a bull market that remains in full motion. YTD (as of April 30, 2021), all major indices are up, with S&P +11.3%, ACWI +9.33%, and NDX +7.5%, vs. ROBO +4.52%, THNQ +2.43%, and HTEC +5.74%.1 At the same time, alpha (a measure of the active return on investment) continues to be hard to come by due to the chop and never-ending rotation underneath the surface that continues to frustrate even the nimblest investors. But despite the temporary, pandemic-driven slowdown, we are seeing promising pockets of growth across the landscape of our ROBO constituents.
- Fanuc: The world’s leading robot maker, Fanuc, recently announced record-high robotics orders and a large share buyback. Orders jumped 60% YoY and 19% QoQ, with robotics orders reaching a new all-time high, slightly above 4Q20 levels. Factory Automation orders are up 84% YoY, and the company’s 1Q21 OP of ¥47.3B exceeded guidance by 15% and consensus by 5%. Fanuc will repurchase up to 2.5 million shares, or 1.3% of those outstanding, for up to $50B by March 2022. This represents about 40% of annual net income which, combined with a 60% target dividend payout, will total over 100% shareholder payout for 2021.1
- Proofpoint: We anticipate M&A activity to accelerate in 2021—especially in security and SaaS. Proofpoint’s April announcement that it has agreed to be acquired by PR firm Thoma Bravo makes it a posterchild for this sea change. A leader in email security for the enterprise, Proofpoint is a pioneer in applying AI and machine learning (ML) to email security solutions. Its innovative solutions stop malware and help businesses protect employees from phishing and other cybercrimes across mobile and cloud solutions at the edge. The company’s relationship with Microsoft is a critical part of its story, but in order to become a platform business, Proofpoint would have had to spend significantly to build out its solution. The acquisition will accelerate that progress dramatically. Thoma Bravo will pay $176/share in cash for Proofpoint, equaling about $12.3B and representing around 34% premium to Friday's close. The valuation of $176/share translates to 12x EV/FY21E and 8x EV/FY22E sales, and an EV/FY22E FCF of 37.8x (consensus figures).2 These are good multiples of a company showing relatively slower growth than its security peer group. The transaction is expected to close in the third quarter of 2021.
- Align Technology: Makers of the Invisalign teeth straightening system, Align Technology provided first-time 2021 revenue guidance of $3.7-$3.9B that exceeded consensus by 6-12%. The company’s adjusted EBIT margins of 26.5%-27.5% were also nicely ahead of the street (25.6%).3 Consumer demand and patient traffic improved in April, and with broad-based strength across regions and segments, the company expects to see revenue growth of ~25% in 2H21. While it is difficult to determine if recent performance has benefited from patient backlog or consumers adopting treatment during COVID, management remains confident in the growth outlook due to the strength of sales across products, customer channels, and regions, and to significant investments made in marketing, salesforce, and doctor education that are already paying off. This strong execution should position the company to grow in line with its 20-30% long-term target off the 2021 revenue base. Based on this outlook, the stock continues to look compelling compared to high-growth peers in Healthcare.
Amid these dynamics, I continue to ponder where we sit in the market cycle. The macro-environment continues to be supported by both monetary and fiscal avenues, but the tone of the current market is one of angst, rather than bullishness. Bears continue to grow louder on margins and valuations that effectively price-in a rosy picture. Bulls continue to be backed by steady price action, as well as momentum in quality underlying businesses that continue to compound.
Here at ROBO Global, we continue to recommend an upward shift on the quality curve. We remain globally diversified to protect against execution and margin risk, and we are more skeptical on work-from-home beneficiaries that may not be able to meet lofty growth expectations against very difficult comparisons. All three of our portfolios are battle-tested, and they are designed to invest across the global value chains with strong balance sheets to weather the inevitable storms. My FOMO about the recent market fads is likely to be forgotten in pretty short order. For those who wait on the sidelines to invest in robotics, AI, and healthcare innovation, however, that FOMO is likely to evolve into lasting regret.
Index returns are for illustrative purposes only and do not represent actual Fund performance. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. For actual Fund performance, please visit www.roboglobaletfs.com/htec www.roboglobaletfs.com/thnq www.roboglobaletfs.com/robo
1 Source: Fanuc
2 Source: Proofpoint, Bloomberg
3 Source: Align Technology