Turnkey Tech Investing: April 2023 Market Brief

By Bill Studebaker, CIO & President, ROBO Global 

Utter the dreaded words “credit crunch” and everyone is immediately haunted by the ghosts of 2008. Danger seems to be lurking around every corner. But is it a fact that a credit crunch must be cataclysmic? At least at this point, that doesn’t seem to be the case. While it’s certainly premature to brush off the potential impacts of credit tightening, it appears as though the most worrisome tail risks simply aren’t playing out to create a worst-case scenario—at least not yet. 

Thankfully, deposit flight has ebbed and consumer confidence remains relatively buoyant. Yet investors continue to be quite bearish and many macroeconomic headwinds remain intact. But if the Beige Book [1] is any indication, the delta of change doesn’t appear to be anything close to cataclysmic. What’s more, Bank of America, Goldman Sachs, and M&T Bank all posted relatively strong performance in Q1, showing that the consequences of the current credit tightening may be more localized and, hopefully, limited in scope.

Having said that, we did see the markets digest all this news with a healthy dose of profit taking as evidenced by the pullback in our indices. The ROBO Global Artificial Intelligence ETF (THNQ) declined -6.47%, and the ROBO Global Robotics and Automation Index ETF (ROBO) dropped -2.43%, while the ROBO Global Healthcare Technology and Innovation ETF (HTEC) advanced slightly by +1.35%. [2]

It feels as though investors have a negative view of the big picture, but are we levitating here as everyone gets fooled because they love their names but hate the market? With earnings just having commenced, much of the story remains to be told. At some point, we believe it will become clear that we have safely climbed the Wall of Worry. Is it possible that we have finally reached that point? For months, we’ve been waiting (and waiting) for a hard dose of reality to wake us up. Could it be that we are back to a bull market? With half of S&P 500 constituents having reported (and US earnings serving as a barometer for the global economy, particularly when Fed action leads central banks globally), the earnings per share (EPS) beat rate is now at 79%.

If our own holdings are any indication, good news may be in store:

• Rockwell Automation, the top supplier of factory automation control systems, reported a large beat and raise. Q1 EPS of $3.01 was 17% ahead of consensus on better sales and margins. It’s interesting to note that, historically, organic sales growth of 27% is the kind of number ROK typically only posts when coming out of a recession. ROK raised their FY23 EPS guidance to $11.50-12.20 from $10.70-11.50 with an organic sales growth range of 13-17% from +11-15%. [3] Management commentary was bullish, with margins now expected to consistently exceed 30% and, most importantly, some excitement around the large number of new manufacturing facilities launching in the US.
• Intuitive Surgical reported worldwide robotics surgical procedure growth for the first quarter that beat the average analyst estimate. The numbers across the board were impressive. Worldwide procedure growth was up +26% vs. +19% y/y, against an estimate of +15% (Bloomberg Consensus). Revenue popped to $1.7B, +14% y/y, against an estimate of $1.6B. Instruments and accessories revenue reached $985.6M, +22% y/y, against an estimate of $913.2M. Systems revenue declined slightly to $427.4M, -0.2% y/y, but was up compared to the estimate of $405.9M. Services revenue hit $283.2M, +14% y/y, exceeding the estimate of $273.4M. From an installed-base perspective, surgical system placements jumped to 312, +0.3% y/y, against an estimate of 281; and the Da Vinci Surgical System installed base came in almost right on target at 7,779 systems, +12% y/y, against an estimate of 7,786. [4]

That said, there are noteworthy exceptions of stocks taking down numbers:

• Cloudfare disappointed thanks to the combination of a highly elevated valuation and slowing growth which management attributed to lengthening sales cycles amid macro uncertainty. The punishment came swiftly on Friday with a post-earnings decline of -20%[5], swiftly undoing the impressive gains of the past few months. The catch: Cloudflare continues to grow at a healthy pace, and despite its outlook for the year coming in far below expectations, the valuation remains surprisingly high.
• Illumina delivered a surprisingly mixed bag, reporting a Q1 EPS of $0.08 to exceed consensus by $0.06 and delivering a positive return on equity of 2.26%. On the flip side, the company reported a negative net margin of 100.92% [6], pointing to expenses that far exceed current revenue. Whether those expenses turn out to be the “necessary evil” that supports future growth remains to be seen.

As we slide deeper into Q2, we anticipate more upside—especially as companies in every sector continue to pursue the benefits of robotics, automation, and AI. Even as investors struggle to decide if now is the time to run with the bulls, companies around the globe continue to deliver the technologies that are transforming businesses, industries, and supply chains everywhere. The most lucrative time to invest is often at the turning of the tide. The “credit crunch” is just one factor stressing the markets. But whatever decisions lie ahead from the Fed, wherever inflation takes us, and whenever the market definitively changes course, we believe the companies delivering mission-critical innovation are leading the way toward a smarter tomorrow.

ROBO Top Ten Holdings, HTEC Top Ten Holdings, THNQ Top Ten Holdings

SOURCES:
[1] Commonly known as the Beige Book, this report is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources.
[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: Rockwell Automation
[4] Source: Intuitive Surgical
[5] Source: Cloudflare
[6] Source: Illumina

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