By Bill Studebaker, CIO & President, ROBO Global
After one of the busiest weeks of the year for earnings and economic data, investors again found themselves left with more questions than answers heading into the final month of summer. While the menu of unknowns has remained largely intact for quite some time, a broader lack of progress around these overhangs has certainly made it challenging for investors to have conviction in this odd and highly frustrating market. Given the recent rebound in stocks over the past month (including a bump in both the S&P 500 and MSCI World Index1, up more than 9% and 7% respectively), could fear of the unknown finally be giving way to newfound confidence in valuations finding a floor? We think so.
For the month of July, the ROBO ETFs benefitted from current investor sentiments. ROBO Global Healthcare Technology and Innovation ETF (HTEC) rose +9.17%, ROBO Global Robotics and Automation Index ETF (ROBO) closed +12.73%, and ROBO Global Artificial Intelligence ETF (THNQ) jumped +11.14%2. As I wrote a few weeks ago, investors have sold off their portfolios at a record pace out of fear and excess leverage. Our own analysis points to an open door to potential growth for those with greater insight and trust in the (relatively) predictable ebbs and flows of the capital markets. If our data proves correct, the market has thrown out the baby with the bathwater, effectively pushing prices below actual valuations. As confusing, frustrating, and unpredictable as the economic winds and policy decision-making may be, what lies ahead is likely a moment of opportunity for investors willing to be greedy.
Amid the flurry of meaningful earnings prints last week, all eyes were on Powell and the Fed. While a 75 basis point (BP) hike was in line with expectations, the combination of Powell’s commitment to being data dependent and his press comment that interest rates have reached a “neutral level” gave investors hope for a more dovish tack heading into the final months of the year. The GDP data from this week confirmed that we are in a technical recession, meaning that there have now been two consecutive quarters of real GDP contraction. This does not, however, mean we are completely out of the woods—at least not yet. Though consumer balance sheets have been surprisingly resilient amid record inflation levels, consumer sentiment and inflation expectations are still at near all-time lows3. To support this positive trend going forward, continued wage gains will be critical.
On the equities front, a week of earnings and pre-earnings announcements added plenty of fuel to the fire for both bulls and bears. Walmart (WMT) announced a guide down in a surprise business update, citing that “increasing levels of food and fuel inflation are affecting how customers spend” and that the company expects more pressure on general merchandise in the back half of the year as more markdowns will be required to move inventories. The company also noted a heavier mix of food and consumables for comp sales during the second quarter, highlighting the shifting of consumer wallet away from discretionary goods4. While the same factors could have had a similarly negative impact on Amazon (AMZN) over the past few quarters (particularly for its retail business which has already struggled with margins due to cost pressures), the company instead delivered an astoundingly clean print this week. This came on the heels of a record Prime Day which added sales of 300 million+ items worldwide (+20% YoY)5 for the quarter. As is often the case, timing was everything!
Though not everything was smooth sailing, we are happy to report that many of our ETF holdings also posted solid earnings results. Here are just three of the highlights:
- ROBO holding Dassault reported another strong quarter, beating consensus on revenues, operating profit, and EPS in Q2. The company beat revenue expectations (€1.33B) and grew to €1.38B, up 11% year over year (YoY), with Subscription & Support revenue growing 10% YoY. Mainstream Innovation Software revenue climbed 8% YoY (SolidWorks was up mid-single digit, impacted by China’s lockdowns). Service revenue and Licenses & Other revenue were both up 14% YoY respectively. The company’s adjusted Earnings per share (EPS) of €0.26 was up +21% YoY and beat consensus by 4%. However, IFRS diluted EPS was €0.09, down 32% YoY, impacted by a one-time charge of €145 million (with no cash impact) concluding a tax dispute for fiscal years 2008-2013. Overall. growth was broad-based across regions, products, and end-markets, despite a challenging macro-economic backdrop. For the FY, the company reaffirmed revenue of €5.49B-€5.54—or growth of 9-10%—and raised 2022 EPS guidance to €1.08 - €1.10, or 14-16% growth (up from previous guidance of 9-11%). After a strong first half, management expects a slowdown in its Services segment in Q46.
- HTEC holding Abbott Laboratories (ABT) reported a beat on top and bottom and raised its FY22 EPS guidance to at least $4.90 from at least $4.70. Revenue of $11.26B beat consensus of $10.33B. EPS of $1.43 beat consensus by 30 cents. Strength was driven by Diagnostics, with revenue of $4.3B up 37% YoY on an organic basis, of which Rapid Diagnostics of $2.75B grew 85% YoY7. The company shows continued strong market positions in fast-growing and underpenetrated end markets, as well as strong execution on new innovation. ABT continued to be a strong fit for HTEC.
- THNQ holding Spotify was up 14% as total users and revenue beat estimates. The company reported revenue of $2.91B against $2.85B expectation, while adjusted EPS dropped, closing -$0.86 vs. -$0.72 per share expectation. That said, Spotify tends to prioritize subscriber growth over quarterly profits, and the numbers there were impressive. Despite the closure of its Russian operations, total monthly active users (MUAs) came in at 433 million, growing 19% YoY, and 5 million above guidance. The growth can be attributed to successful marketing campaigns, Gen Z strength in Latin America, and account reactivations in Europe. Even so, net additions of 19 million represented the company's largest ever Q2 growth, with expectations set even higher than anticipated for Q3 at 450 million for MUAs. Premium subscribers grew 14% YoY to 188 million, 6 million above the Q1 total, and slightly above company guidance of 187 million8.
As we slide into August, the sun does seem to be shining a bit brighter for investors. The last few years have certainly taught us all the importance of being able to adapt with ease to whatever changes may come our way. For investors who have been waiting patiently for the economic winds to bring new buying opportunities, adapting to this welcome change in the ‘market weather’ may be the perfect tack to ensure much smoother sailing ahead.
1 MSCI is an acronym for Morgan Stanley Capital International. The MSCI World Index captures large and mid cap representation across 23 Developed Markets (DM) countries
2 Source: ROBO Global®, S&P CapitalIQ, For standardized performance data current to the most recent month end, please visit www.roboglobaletfs.com.
3 Source: University of Michigan
4 Source: Walmart
5 Source: Amazon
6 Source: Dassault earnings report
7 Source: Abbott Laboratories earning report
8 Source: Spotify earnings report
The performance data quoted represents past performance and is no guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance data quoted.
Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Holdings are subject to change.
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the fund or any security in particular. Please consult your financial advisor for further information.