Turnkey Tech Investing: October 2021 Market Brief

After nearly half of the S&P 500 reported earnings as of 10/29/2021the Q3 earnings season is nearing the finish line here in the US. As investors take it all in, understanding how supply chain limitations, costs, and inflation pressures will affect the bottom lines for companies across the market remains the primary focus. Consumer demand has been strong since the start of Q4, but it’s unclear whether demand will continue to outpace supply—or how long the current challenges will last.  

Despite the uncertainty, October brought good news for the markets in general, as well as for all three of the ROBO indices: the ROBO Global Healthcare Technology and Innovation ETF (HTEC) climbed +2.41%, the ROBO Global Robotics and Automation Index ETF (ROBO) was up +6.26%, and the ROBO Global Artificial Intelligence ETF (THNQ) led the pack, rising +8.42%1. 

Interestingly, even with the wave of positivity around strong earnings growth, we are seeing an unusual divergence in how investors are reacting to news. While earnings beats are being well rewarded,  misses (even the small ones) are being severely punished. In fact, with good news being priced in much more than bad news, the magnitude by which companies with lower earnings are underperforming the S&P 500 is greater than historical averages going back as far as 2010. 

This is how we’re seeing that dynamic play out in the real world: 

  • Dassault Systèmes, whose 3DEXPERIENCE platform and applications help companies create virtual ‘digital twins,’ is up 40% YTD2, beat on earnings and topline revenue. That growth came after the company reported a 12% jump in Q3 revenues and a 23% increase in operating margins, revised FY21 guidance to over 4.8B euro, and amended its EPS growth target to 25% (up from 19% previously). Revenues in APAC (India/Japan), which now account for nearly 30% of the business, were up 13% for the quarter. Large tailwinds resulting from construction and infrastructure investments in the US and abroad drove revenue growth in every one of the company’s market segments, with industrial (which accounts for 48% of total revenue) up 4% YTD, and Life Sciences (which accounts for 20% of total revenue) up 19% YTD. 

 

  • Vocera Communicationsa leader in clinical communication and workflow solutions, reported Q3 revenue of $63.6M, an increase of 18% over Q3 20203. Here, too, investors were happy to celebrate the significant jump in revenue, as well as news of 15 deals over $1M for the quarter, including the second largest deal in its history with the Cleveland Clinic. Other news included beats on top and bottom, record gross margins, and raised guidance, plus a whopping 67% y/y increase in deferred revenue from order backlogs. Plus, adjusted EBITDA grew 14% y/y, beating consensus by a landslide. An example of healthcare innovation at its best, Vocera is proving to be instrumental in helping large health systems build strong communications backbones and enabling broad virtual care. Investors couldn’t be more pleased.

 

  • Fanucthe industry leader in CNC systems, robotics, and factory automation, hasn’t fared nearly so well, with investors making their dissatisfaction with the Q3 numbers very clear. The company’s Q2 revenues swung high, with sales more than doubling to a record high of ¥224.5B4 in July. But though Q3 orders of ¥203.8B were in line with consensus, investors bristled at the fact that revenues for robotics machines came in below estimates. Despite the fact that revenues for factory automation and robots were on par, the stock declined nearly 8% on the EPS announcement. With production constraints proving to be more severe than anticipated, negative trends in parts procurement and costs persisting, and order backlogs at an unprecedented high, there is concern about how component shortages might impact demand and, ultimately, if Q4 revenues will fall short. With total earnings now ~10% below expectations, Fanuc announced revised FY3/22 guidance of ¥177.5B, down from ¥194.4B previously.  

 

With investors as fervent about celebrating the wins as penalizing the misses, the Q3 earnings season appears to be dictating the direction of the broader market as we head into the final stretch of 2021. The debate between ‘transitory’ vs. ‘not transitory’ continues to rage on, and investors are looking hawkish. The headwinds of labor constraints, supply chain bottlenecks, and inflation have all been discussed and dissected over the past 6 months, just as strong retail participation and the need for broader institutional investors to keep pace with benchmarks have kept the market near all-time highs for most of 2021As this earnings season comes to a close, watch for the bulls and the bears to continue to debate what demand dynamics, existing headwinds, and the actual numbers mean for the future. One thing we can all agree on: the second derivative on earnings revisions has slowed, bringing us on a path more ‘normal’ than we’ve seen since early 2020.  

As always, we continue to focus on the long-term growth potential for the companies in the ROBO, HTEC, and THNQ ETFs. While the market will always ebb and flow—and investors’ reactions to the tide will rise and fall just as predictably—the need for automation continues to increase rapidly. Investors who choose to brush off the misses and focus on the future growth of robotics, artificial intelligence, and healthcare technologies may reap the rewards. 

 

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: Dassault Systèmes 

3 Source: Vocera Communications 

4 Source: Fanuc 

 

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. 

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