By Bill Studebaker, CIO & President, ROBO Global
The recent market sell-off around the world reminds us how quickly things can change. Even more, it’s clear that we are not out of the woods quite yet when it comes to COVID. Investors welcomed Powell’s re-appointment and Brainard’s nomination for Vice Chair, driving treasury yields near six-month highs. But on the heels of that uptick came news of the newest variant, Omicron, which triggered one of the most dramatic market moves of the year as fears of another global slowdown brought us near November lows for yields.
The impact was felt across the markets, and the ROBO Global portfolios were not spared the blow. For the month of November, the ROBO Global Healthcare Technology and Innovation ETF (HTEC) declined
-8.21%, the ROBO Global Robotics and Automation ETF (ROBO) had a marginal decline of -0.69, and the Robo Global Artificial Intelligence ETF (THNQ) fell -3.42%.1
It’s hard to believe that it was only last week when the FOMC minutes confirmed that the Fed is considering a faster taper and that the lowest level of weekly jobless claims since 19692 indicated more labor tightening on the horizon. It didn’t take long for investors to shift their focus towards how the Fed will respond to the evolving situation around Omicron and whether this new version of the COVID virus has the potential to dismantle the current timeline for tapering or to push global businesses into yet another trough.
Taken together, we are set up for quite the final stretch going into year-end. The heightened pullback at the index level in the final days of November and the first few days of December likely enabled stock pickers to generate more alpha (Alpha (α) is a term used in investing to describe an investment strategy's ability to beat the market, or its "edge") after weeks of indices grinding higher despite the carnage lurking beneath the surface. As losses mounted across every sector, it was clear that the overarching themes for the Q3 earnings season was ‘punish the misses’ and ‘react with caution to the beats.’
Take, for example, Upstart (a THNQ holding). Upstart is a leading artificial intelligence (AI) lending platform designed to improve access to affordable credit, while reducing the risk and costs of lending for bank partners. By leveraging Upstart's AI platform, banks can offer higher approval rates and lower loss rates—plus the ability to deliver the digital lending experience that is in high demand by today’s tech-savvy customers. Upstart went public in December 2020 and shares were recently up over 400% since its debut.3 But Upstart declined almost 20% after posting mixed earnings results and is now ~55% off from the highs. A relatively young company with a short history of big guides, 3Q marked Upstart’s third earnings period as a public company. In 2Q’21, the company reported nearly 500% YoY growth, so after such monster results, investor expectation for the quarter was overly high going into the print. In almost every way, Upstart did not disappoint, delivering:
Huge profits—$0.60 vs. the expected $0.33
Total revenues of $228M, significantly higher than the $215M expectation
348% YoY increase in lending volume, totaling 36,300 loans, and a higher conversation rate, both of which were in line with expectation
EBITDA (Earnings before interest, taxes, depreciation and amortization) of $59M was extremely solid vs. expectation
But investors couldn’t help but focus on the stumbles:
Due to higher customer acquisition costs and lower margins for the auto loan piece of the business, contribution profit margin was 46% vs. the expected 52% (yet still better than what the company guided to in 2Q)
The upside was mainly driven by higher-than-expected interest income, rather than fee revenue which was ‘just’ in line
The result: the company has been talked down for 4Q. But is the shift in sentiment justified? Upstart is a young platform, and the company is still in the early stages of trying to achieve market penetration and market share gains. It will also take time for first-time applicants to return for different products, including auto loans which are more than 5x the size of personal loans, so the potential in that channel alone is tremendous. We don’t think it will take long for investors to begin to forgive the stumbles and focus on the longer-term opportunity.
On the flip side of the equation is Ambarella (a ROBO and THNQ holding). The company posted another game-changer quarter after its Automotive funnel of 6-year revenue tripled YoY4 thanks to new wins, including UBER and a high-profile EV company. There's a lot of scarcity value around this name, especially heading into CES where they are expected to launch new computer vision chips that will take on Nvidia in the autonomous vehicle space. The surprise here were the longer-term pipeline positives that emerged from Ambarella’s recent earnings call, including:
Tripling of the automotive revenue ‘funnel’ to $1.8B (vs. the $600M number provided a year ago and less than $100M in the year just completed)
New design wins at Uber and Shanqi are making it increasingly clear that Ambarella is emerging as a leader in the category of automotive computer vision
For Uber, Ambarella announced a joint win with subsystem supplier Nextbase, which is building a two-camera system for select Uber cars that includes driver monitoring. (This is similar to the deal Ambarella announced with Asia ride-hailing company Yandex last quarter.) Shanqi is a Chinese trucking company that plans to use Ambarella for its forward-facing Advanced Driver-Assistance Systems (ADAS). We view single camera forward-facing ADAS as an important market—the largest ADAS market by volume (currently dominated by Intel’s Mobileye in the West). Even pessimistic investors didn’t begrudge Ambarella a well-deserved double-digit jump in the stock price.
Today, the focus for many investors continues to be around margins and how businesses are handling the impacts of inflation and COVID-driven supply chain pressures. If the current market has taught us anything, it’s that a lot can change in a matter of days—and that, as the Q3 results displayed clearly, there is no room for complacency. The 3Q earnings season certainly drove home the narrative of this being a stock-pickers’ market. For investors who believe in the very real long-term value of the robotics, automation, and healthcare technologies, conviction and patience remain a necessity. We believe their rewards surely shall come!
1 Source: ROBO Global®, S&P CapitalIQ, For standardized performance data current to the most recent month end, please visit www.roboglobaletfs.com
2 Source: US Department of Labor, https://www.reuters.com/markets/us/us-weekly-jobless-claims-drop-lowest-level-since-1969-2021-12-09/
3 Source: Upstart
4 Source: Ambarella
The performance data quoted represents past performance and does not guarantee future results
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 funds or any security in particular.