The ROBO Global Robotics and Automation Index (ROBO) returned 5.6% during the third quarter of 2024. The robotics space overall has still underperformed over the past year, due to a mix of megacap divergence as well as a lag in end-market. For example, Omnicell, one of the quarter’s top performers (+58.9%), trades as 1.8x forward EV/sales and is still down 4% year-over-year at the end of Q3. Similarly, many German (+12.4%) companies in the portfolio also trade at relatively low valuations, albeit with slower and steady revenue growth, such as Duer (+17%) which trades at 0.45x forward EV/sales and 2.45x forward P/E. However, earnings season commentary and macro events show signs of recovery, indicating we may be past the bottom of the cycle.
This complex landscape of valuations and performance within the robotics sector suggests potential opportunities as the market recovers. Ongoing revenues lag behind new robotics deployments, due to a number of factors. The election year, pull-through from end markets, record high manufacturing construction in the U.S., and the emerging benefits and applications of AI in robotics all have impacted the sector.
Q3 2024 saw notable developments across various aspects of the robotics sector. Japan constituents, representing 20.7% of ROBO, were up 7.8% for Q3. They demonstrated resilience despite temporary market fluctuations, namely the Japanese reverse carry trade. The initiation of interest rate reductions bodes well for the capital-intensive robotics space, with potential post-election clarity likely to amplify this positive effect. Technological advancements continue apace, with ongoing development in humanoid and autonomous mobile robotics across various applications. Major players are also entering the field, exemplified by Apple’s reported internal launch into home robotics. ROBO includes many recognizable brands. However, it also comprises numerous “behind-the-scenes” players that contribute significantly to the sector’s value and innovation.
The sensing subsector (+17.1%) exemplifies the strength and diversity within ROBO. It includes rising stars like Samsara (+41%), which excels in physical automation tracking, alongside established Japanese companies such as Omron (+40.3%) and Keyence (+13.7%). These firms provide crucial industrial automation sensing solutions, which are vital to manufacturing and automation processes worldwide. Their strong performance underscores the growing importance of advanced sensing technologies in the global robotics and automation landscape.
Computing and AI, the weakest subsector this quarter (5.1%), experienced a cooling-off period for some of its recent high performers. Companies like Microchip (-11.6%), Qualcomm (-14.3%), and Cadence Design Systems (-10.9%) saw a slowdown after nearly two years of strong AI-driven momentum since the Q3 2022 low. This shift suggests a more diverse pattern of returns emerging within the sector. Notably, even industry leader NVIDIA (-1.7%) found itself in the bottom third of performers, indicating a potential rebalancing of growth across the AI and computing landscape.
ROBO’s Q2 earnings season delivered positive surprises on both top and bottom lines. However, overall year-over-year EPS declined by 7.7%. Despite this, full-year estimates remain optimistic at +8.6%, with expectations of a stronger Q4 to end the year. Looking further ahead, projections indicate a robust 20.7% growth in 2025 (based on FactSet Consensus Weighted Average as of Sept. 27). Notably, the portfolio’s profitability profile is set to improve, with the percentage of profitable constituents expected to increase from 95% in 2024E to 99% by 2026E. This expectation underscores the sector’s growing maturity and financial stability.
The late-quarter rebound in China has primarily benefited larger tech players. However, the effects of stimulus measures are expected to spread to the broader economy, potentially boosting companies with Chinese exposure, including many of our Japanese constituents. ROBO’s recent addition of Hon Hai Precision Industry (commonly known as Foxconn), with an estimated 75% of its operations in China, reflects this trend. However, Foxconn’s expanding automation capabilities in countries like India and Vietnam also highlight a broader shift towards diversifying manufacturing bases. This development could reshape the robotics and automation landscape in Asia.
We believe the manufacturing cycle has reached its nadir. This signals potential upside for our largest subsector and tech areas such as actuation. Projections for full-year 2024 show year-over-year sales declines for 27 out of 78 constituents. However, the outlook for 2025 is significantly more positive. We expect only three constituents to see declining sales in 2025. The overall portfolio is anticipated to achieve 10.6% sales growth (based on weighted average FactSet consensus as of Sept. 27). This forecast underscores our confidence in the sector’s recovery and growth potential.
Looking ahead, numerous promising applications are on the horizon, with immediate catalysts emerging in semiconductor and energy manufacturing. However, current valuations do not yet fully reflect this potential. This presents what we believe to be attractive long-term opportunities as this new cycle unfolds. Importantly, the impact of AI on robotics is still in its early stages and should not be underestimated. As this synergy develops, it could drive significant innovation and growth in the robotics sector. This could reshape the industry landscape in the coming years.
VettaFi LLC (“VettaFi”) is the index provider for ROBO, for which it receives an index licensing fee. However, ROBO is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of ROBO.
For more news, information, and strategy, visit the Disruptive Technology Channel.
