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Disruptive Tech M&A Offers Defy Market Volatility


Whereas IPOs and SPAC offers have stalled within the face of a drop in public fairness valuations, M&A and startup funding in robotics, AI, and healthcare applied sciences has remained sturdy over the previous couple of quarters. 5 members of the ROBO International Innovation Indices have obtained takeout gives. On this installment of “Comply with the Cash”, we spotlight offers that illustrate the monetary and strategic enchantment of key expertise traits to this point in 2022.

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Jeremie Capron:

My title is Jeremie Capron. I am the Director of Analysis right here at ROBO International, and I am speaking to you from New York. With me on the decision are my colleagues from the analysis staff, Nina Deka and Zeno Mercer. In the present day, we’ll discuss robotics, AI and healthcare applied sciences with a concentrate on offers and fundings. So, we will probably be taking a look at each the general public fairness aspect, the place now we have seen some main shifts within the final six months, in addition to the non-public aspect and enterprise capital, and we are going to talk about among the key traits that we’re watching. We’ll additionally be certain that to avoid wasting time to your questions. As lots of you already know, we frequently share a few of our analysis on the web site and biweekly emails, and we simply revealed a brand new report that is overlaying in the present day’s presentation. So, be at liberty to obtain this report at

So, let me begin with a fast reminder of what we do right here. We’re a analysis and funding advisory firm that is centered on robotics, AI and healthcare applied sciences, and we designed thematic funding methods round what we imagine to be a technological revolution. In the present day, there’s over $3 billion in funds monitoring our methods, they’re primarily ETFs. Probably the most notable index might be ROBO, R-O-B-O, that was the primary robotics and automation index portfolio that launched in 2013, and now in its ninth 12 months. Our analysis round automation led us to understand that one thing essential is occurring in two particular areas. So, within the final 4 years, we launched two extra index portfolios. The primary one is T-H-N-Q or THNQ, that’s the synthetic intelligence index. The second is H-T-E-C or HTEC, that’s the Healthcare Know-how & Innovation Index.

These are usually not your conventional index ETFs or funding methods mix a analysis pushed strategy with the advantages of index investing and the ETF wrapper. The portfolios are picks of greatest in school corporations from world wide, small, mid, large-caps which can be kind of equal weighted and rebalanced quarterly. So, they’re diversified with the 60 to 85 holdings, but they’ve a really excessive energetic share and low overlap with broad fairness indexes just like the S&P500. The three methods have outperformed international fairness since inception, as you’ll be able to see on this desk of index returns as of the tip of April 2022, even after the brutal decline previously few months. So, why are we speaking about M&A and fund flows? That is essential to us as a result of M&A has been a powerful tailwind to ROBO’s returns since we first designed the portfolio in 2013.

Within the eight or 9 years that we have been operating it, we have seen 27 takeover makes an attempt on our portfolio corporations. That is within the context of a bit of greater than 80 corporations within the index. We’ll get again to that. However the essential level right here is that now we have seen a transparent acceleration previously two years, regardless of the numerous enterprise disruptions in the course of the pandemic. Actually, 2021 was a report 12 months for mergers, for acquisitions and enterprise funding. Because the pandemic actually bother charged the digitization of our economic system and left some main scars as we got here out to the opposite aspect. You concentrate on the provision chain disruptions, you consider rising commodity costs and transportation prices and the shortages and semiconductors, and now more and more urgent labor shortages.

So, this has led to a race to digitize, to automate, and this has made automation a prime precedence for enterprise leaders and corporations world wide. Particularly for these bigger organizations that more and more perceive, they should have a presence and capabilities round automation. In lots of circumstances, they’re behind the curve and they should purchase slightly than construct. They’re able to pay up for high quality companies. Now, it is a very a lot structural development in our view, however the large shift within the monetary markets over the previous six months have clearly modified the dynamics by way of capital deployments. In simply six months, now we have moved from a type of Goldilocks of sturdy financial and revenue development to probably the most complicated macro state of affairs in a long time. We have now warfare in Europe, now we have oil that is up 75% previously 12 months, and above $100 a barrel.

We have now indicators of a slowing consumption simply when the Fed is beginning a charge hike cycle. I believe tech is de facto the place the motion has been concentrated previously six months. We have seen a dramatic collapse in probably the most extremely valued segments of the markets, probably the most speculative areas of the market. We have seen primarily the good points of the pandemic being given again, and in some circumstances, some extra. It isn’t solely the Zoom and Peloton and Robin Hood, in actual fact, almost half of the NASDAQ shares are down 50% or extra in the present day from the excessive. A couple of in 5 shares is down greater than 75%. So, that’s akin to the dot-com crash in 2000, and the FANG shares are down greater than 35% on common 12 months thus far. Our three methods are down between 27% and 34% as of the shut yesterday, so on the Might seventeenth.

Now, that qualifies because the sharpest drawdown now we have seen since we began ROBO in 2013, and it’s on par with the selloff in the course of the COVID lockdown panic. Now, the excellent news is that in evaluate, this valuation reset is basically performed out. I’ll illustrate this with a number of charts in a minute. However earlier than that, on this subsequent slide, I need to spotlight that the expertise in market leaders in AI, in robotics, in healthcare applied sciences, the businesses in our three index portfolios, they are usually top quality companies by way of their margins, by way of their return on capital, and the power of their stability sheets. This chart right here exhibits the share of corporations with a internet money place for ROBO, HTEC and THNQ, and among the broad fairness industries. So, 65% of the businesses within the synthetic intelligence index, and 55% of the businesses within the ROBO index have extra cash than debt, which is a measure of stability sheet power.

That’s much more that you will discover within the NASDAQ or the S&P500 index. Additionally, need to level out on the subsequent slide that the businesses we’re speaking about right here, they aren’t simply US corporations. You possibly can see right here that now we have greater than 13 international locations represented in ROBO, and that quite a lot of them are small and mid-caps. Between 50% and 60% of the ROBO and HTEC portfolios are in small and mid-caps. The overwhelming majority of them are usually not represented within the S&P500 or international fairness industries. So, most buyers have very restricted publicity to the businesses on the forefront of robotics, AI and healthcare applied sciences. So, let us take a look at what’s taking place in robotics first, then I am going to move it on to my colleagues to debate healthcare applied sciences and AI, and we are going to wrap up with what’s taking place on the enterprise capital aspect.

So, it is a chart of complete returns for ROBO over the previous 5 years, simply above 12% compounded common. You possibly can see the names of the businesses which have obtained a takeover supply over the previous 5 years. As I mentioned earlier, within the eight or 9 years we have been operating it, we have seen 27 takeover makes an attempt on our portfolio corporations. That is within the context of round 80 plus corporations within the index. You possibly can see quite a lot of exercise in 2020, in 2021. Since we final spoke to you about six months in the past, we have seen one other two transactions this 12 months in robotics index portfolio corporations. The primary one was Vocera which agreed to be acquired by Stryker in January for slightly below $3 billion. I’ll let Nina let you know extra about it as Vocera is a healthcare automation firm that was additionally a member of HTEC.

Then we promote Blue Prism. If we will flip to the subsequent slide, please. You may have a listing of among the most essential offers we have been watching over the previous few months. Blue Prism ultimately agreed to a takeover by SS&C, which is a personal fairness agency. That got here after a brief bidding contest with Vista Companions. So Blue Prism went for about $1.6 billion. Blue Prism is a prime three participant in robotics course of automation, which is actually software program robots that automate enterprise processes that you could find on desktop, computer systems and enterprise techniques. Within the report that you could find on the web site, we additionally talk about a lot of essential acquisitions made by ROBO index corporations like Zebra and its buy of Matrox Imaging to push into pc imaginative and prescient. A deal by Aptiv to spice up its autonomous driving and linked automobiles capabilities by buying Wind River that is a supplier of software program options for, I believe, that was round $4 billion.

So, our view is that regardless of the extra complicated macro backdrop that we’re going through in the present day, M&A is prone to stay sturdy in robotics automation. That is as a result of the current market selloff is presenting enticing alternatives, and acquirers have the monetary capability to accumulate most of the smaller and mid-cap corporations. That’s one thing that I need to conclude with this historic chart of the worth earnings ratio for ROBO. You possibly can see that the world’s main robotics automation corporations at the moment are buying and selling on about 22X earnings, which is beneath the historic common of 24X. That it additionally beneath the pre-COVID ranges of 2019. That isn’t too far off the 19X of the S&P500 index. So, the premium relative to a broad fairness index is comparatively low now. That’s regardless of what we anticipate will probably be superior earnings’ development over the long-term. So, I’ll go away you with that and ask Nina to hitch us and talk about traits in healthcare applied sciences.


Nina Deka:

Thanks, Jeremie. Hello, Nina Deka right here. Thanks for taking the time in the present day to hitch us. HTEC is for these of you knew the story, our Healthcare Know-how & Innovation Index, this has comprised of 80 or so greatest in school healthcare tech corporations that we imagine symbolize the expansion and disruption over the subsequent 5 to 10 years, that’s undoubtedly taking place as we converse within the healthcare sector. Because it pertains to current efficiency, proper now, just like quite a lot of the macro themes that Jeremie was discussing, there was a pullback in healthcare tech. It has not been proof against quite a lot of the macro associated pressures, similar to rising rates of interest, considerations about inflation, the growing price of debt, clearly. So, it brought on quite a lot of buyers to take a pause on some excessive development tech ahead names, significantly, those that won’t be worthwhile or cashflow constructive but.

However, as you’ll be able to see on this chart, the ROBO International Healthcare Know-how & Innovation Index HTEC has tended to outperform the broader markets over the long-term. Actually, even in a 3 12 months interval, it nonetheless continues to outperform international equities. Then, when you take a look at a ten 12 months again check, it nonetheless double the efficiency of world equities. So, we’re remaining lengthy and powerful on healthcare tech for a lot of causes. I am going to dive a bit of bit deeper into among the M&A transactions which have taken place over the past interval. So, let’s have a look at. Jeremie talked about earlier Vocera as a result of it occurred to be an organization in each ROBO and HTEC. Vocera is a very fascinating communications’ supplier with a big presence in healthcare. This can be a expertise that you could be not have observed, and the rationale why is as a result of if it is doing its job accurately, you do not even know it is there.

What I imply by that’s, I like to offer the instance a number of years in the past, I used to be in an enormous trauma hospital in New York Metropolis, Bellevue Hospital. It is a very busy metropolis hospital and it was very loud. I used to be within the emergency room. Everyone was shouting, there was noise alerts in all places. Few years later, I went into this emergency room and all the things was quiet. I requested one of many nurses there, “What is going on on? Why is everybody whispering?” She mentioned, “Properly, we not too long ago applied Vocera, and it is actually brought on a streamlining of all of our operations. We have been capable of flip off all of the alerts and so they actually solely set off when the precise particular person must be alerted when one thing fascinating has occurred. So, slightly than having alarm fatigue, we have had all of it in our households the place you simply hear beep after beep, alert after alert.” That is harmful in a hospital atmosphere whenever you get alarm fatigue.

So, Vocera has a manner of re-coordinating this throughout gadgets to ensure the fitting particular person on the proper time will get the communication. If you talked about M&A, nicely, what occurred? Stryker acquired them. Stryker is a world chief in orthopedics, neuro, backbone, and this firm made a $3 billion acquisition earlier this 12 months to accumulate this communication platform. So, that is consistent with to Jeremie’s level, how we do anticipate to proceed to see M&A. That is consistent with healthcare tech more and more turning into digitized. Healthcare is among the final financial sectors to turn out to be digitized. It is solely not that way back that folks had been nonetheless and possibly nonetheless are filling out paper charts after they go to the physician workplace. So, there’s an enormous alternative for healthcare to proceed to be increasingly digitized. That’s driving and growing quantity of funding exercise.

The Stryker acquisition of Vocera is only one instance. Think about, Stryker is in all places. They’re within the ambulance, your entire affected person’s journey, they’re within the emergency room, they’re within the working room. Then upon discharge, Strykers obtained stuff that may observe the affected person to the house. So, now with Vocera, in an integration platform, they’ll combine all of these gadgets and higher keep watch over the affected person, wherever the affected person is. So, once we take into consideration healthcare in long-term issues, we consider decentralization like an growing quantity of care outdoors of the partitions of the hospital, and increasingly the place the affected person is, whether or not it is their work workplace or their dwelling. So, integration, digitization platforms goes to assist these gadgets observe the affected person wherever they go. Talking of digitization and decentralization, and on this theme, we noticed one other monster acquisition with Masimo in the course of the interval.

Though this one was fairly controversial, when Masimo introduced the acquisition of an organization known as Sound United, they misplaced a few third of their market cap that day. The rationale why is as a result of the market did not like the truth that this world main affected person monitoring firm acquired a shopper digital firm. Why does Masimo must personal audio system? Properly, what Masimo mentioned they acquired was a world distribution channel. Masimo is launching a watch, not just like the Apple watch with all of the apps, however extra of a watch that’ll compete with garment and match. So, what they acquired after they purchased Sound United was a world distribution alternative, an current footprint of people that already preferred that firm and use their electronics.

What the market may be lacking although on this acquisition is that Sound United additionally has a house working system. This can be a multi-room working speaker system that integrates with all of the expertise in a family. Masimo goes to combine all of their excessive tech hospital grade gear into this multi-room working system. What I envision and the corporate’s probably not speaking about that is the chance to actually carry a hospital at dwelling atmosphere a lot, so that ought to one thing occur to the affected person as they transfer from room to room in their very own dwelling, that doubtlessly considered one of their screens may set off an occasion and so they may real-time get a nurse or a health care provider on the telephone by their speaker system and simply say, “Hey, did you fall? Are you okay?” I believe that is revolutionary, and that is the way forward for healthcare. So, once we take into consideration watch and health watches, positive, possibly $1 billion to $2 billion market alternative. After we take into consideration dwelling telehealth gadget, this may very well be $120 billion alternative.

I went into all this element right here as a result of I simply actually wished to spotlight how a lot alternative there may be proper now for funding in healthcare expertise. The macro atmosphere, though, it’s pressuring shares, it isn’t slowing down funding amongst these corporations. Exterior of digitization, there’s quite a bit taking place additionally within the diagnostics world. I am going to simply briefly contact base, Quidel announce the acquisition of Ortho Medical Diagnostics that is anticipated to shut within the coming weeks. That is big, $6 billion. Quidel is a kind of corporations that actually confirmed their market expertise management in the course of the pandemic, this was the COVID antigen check firm. They actually modified the face of what was taking place within the pandemic and let folks return to work. However, now that the pandemic is turning into endemic, Quidel inventory is pulled again quite a bit, and so has their COVID testing quantity. Pairing up with an organization like Ortho is de facto going to assist diversify their product providing and enlarge their footprint, and Ortho is a diagnostic chief. So, we’re excited when that acquisition is predicted to shut for that to be an added asset into the HTEC portfolio.

Then, different cool issues that we’re seeing within the diagnostic house, because it pertains to drag again in COVID quantity, corporations like Danaher and Thermo Fisher Scientific are market leaders, they’re within the HTEC portfolio. These are additionally corporations the place folks thought, “Wow, you guys had quite a lot of COVID testing.” However the market was nervous that there was going to be a pullback in income when COVID testing pulled again. However these corporations are so diversified that they offered quite a lot of devices for COVID testing over the past three years. Now, the labs can use their devices to run different checks. So, whereas COVID volumes have come again, they’ve seen an uptick in different checks. Individuals are going to the physician for different issues now. So, we’re actually blissful to see this stage of diversification, and that is what you get when you will have a portfolio crammed with market leaders, similar to those which can be in HTEC. So, I’ll pause there, and switch it over to Zeno who’s going to speak about THNQ, the AI portfolio. We’ll be again round for questions on the finish of this.


Zeno Mercer:

Thanks, Nina. Howdy everybody. My title is Zeno Mercer, and I will be discussing the THNQ index and technique and M&A in the present day. I will nip the bud. I noticed a query round efficiency. So, 12 months to day efficiency as of in the present day is down 34%. So, these numbers are to April thirtieth. That is the worst selloff for expertise on this house since mainly dot-com, and that is discounting what occurred in March 2020 as a result of that was a a number of sector drop. Talking of March 2020, a number of contraction is introduced down the portfolio to these ranges of valuation. So, in March 2020, THNQ dropped to a 5X for EV-to-sales. We’re now at 5.22 for the EV-to-sales down from 11X on the excessive in 2021. We’re buying and selling at a 37% low cost to the long-term 7.1X EV-to-sales common. At the same time as earnings and prime line majority beat expectations.

For instance, earnings of corporations which have reported to this point are up prime 30% versus the long-term common of 13.7%. So, you may be asking, why is THNQ performing so badly? A few of that’s apparent, international macro conflicts, inflation, simply common concern. In our opinion, that is fairly shortsighted that is why now we have long-term views on these traits, however we perceive that individuals are scared and that is simply how issues are. However taking a look at 2022, which nonetheless sees development in earnings and revenue prime line, in addition to a ramp up in 2023 and past in issues like autonomous automobiles, the metaverse, there’s simply quite a lot of long-term performs right here that we’re enthusiastic about. I am going to get on the M&A in a second, I simply wished to speak about this actual fast.

Out of the 72 THNQ index members, 11 are projected the submit unfavourable earnings this 12 months. The vast majority of those who’s beneath $8 of unfavourable earnings. Of these 11, 5 are projected to turn out to be worthwhile within the subsequent two years. So, simply occupied with our portfolio, now we have top quality corporations which have good money balances mentioned earlier which can be in excessive development areas. I believe the THNQ index has actually matured and confirmed itself within the face of the pandemic. Actually, it is thrived within the pandemic and what is going on on on the earth. The adoption of the digitization of all the things, we have got cybersecurity turning into increasingly essential as we undertake these applied sciences throughout eCommerce, healthcare, fintech. So, the thesis round AI permeating into all aspects of society and companies is occurring.

Regardless of any momentary setbacks and fears like these, these are taking place. So, I am going to enter a few of these different areas like AV and metaverse in a second after I’m discussing one of many M&A offers. So, simply wrapping up right here, THNQ has publicity to each the picks and shovels, the infrastructure, that is community and safety, semi-cloud suppliers on the infrastructure finish. Then on the enterprise aspect, these are the issues that individuals are enthusiastic about of, what’s AI doing? That is the enterprise course of, the buyer, the eCommerce, manufacturing facility automation. I believe having publicity to each offers an ideal upside potential right here, particularly as we have seen simply a number of contraction within the face of constructive information, principally. Up to now week, we have began to check a rebound in excessive development shares throughout eCommerce and shopper possibly indicators of being oversold.

We have got about 7% publicity to China. China does have good AI. We’re nonetheless majority US and now we have corporations across the globe, however, we have got indications of shedding controls over the expertise corporations. We’re additionally seeing de-listing fears proceed to fade. So, quite a lot of funds obtained out of that, and so you possibly can see giant inflows in constructive momentum if that continues to go ahead.

Shifting on to M&A. So, subsequent slide. Thanks. So, after a report 2021 that promote eight THNQ index members. As a reminder, now we have 72 in our ETF proper now in our index. We have now not seen any new takeovers gives to this point in 2022. Since its obsession in 2018, there been 11 member takeouts. So, eight in 2021. The vast majority of these had been non-public fairness funds and consortiums taking tech corporations non-public, they noticed a worth.

So, since our final M&A report in Q3 final 12 months, we have had three takeout gives. So these had been all in This fall 2021. That features Blue Prism, which has been mentioned earlier on this report. The opposite two had been Aspen Know-how and McAfee. So, Aspen Know-how, which is a world chief in asset monetization and optimization software program for industrial corporations was acquired by Emerson at a 30% premium for $10.7 billion in October 2021. That was representing a 31X EBITDA a number of. So, Emerson is combining Aspen with their very own industrials’ workplace enterprise and can retain the Aspen model. So, not in a portfolio, however that was an fascinating deal that is smart for Emerson. On development and wrapping up final 12 months’s a number of take non-public.

One other THNQ member, McAfee the enterprise safety software program firm that does endpoint detection, community and knowledge safety was taken non-public after being public for only one 12 months in November by an investor group comprising of Creation, Permira, Crosspoint Capital, and plenty of others for $14 billion enterprise worth representing a 26% premium. Shifting on to a few of our THNQ index member acquisitions, Microsoft acquired Activision, which was one of many greatest offers within the historical past of all offers. The factitious intelligence universe, gaming and cybersecurity have been two of probably the most energetic areas of M&A.

So, what’s Microsoft’s acquisition of Activision Blizzard imply for Microsoft and the remainder of the ecosystem? Properly, quite a lot of that is the concentrate on the metaverse. You may have gaming, which is the plain story behind Activision. However when you look a bit of deeper, the core elements of Microsoft are the way in which we work together and talk digitally, and that is altering. That is going to be extra built-in. Finally, 10 years from now, 20 years from now, we would not have screens we’re taking a look at, may very well be overlaid in AI and augmented actuality on our faces, contact lenses or glasses. Microsoft realizes this and so they need the most effective expertise attainable. So, a gaming firm that is aware of how one can design nice consumer expertise, interactive design, and actually debug complicated interactive environments is nice for them as they give the impression of being to broaden into this. So, I really met and spoke with an SVP at Microsoft a number of weeks in the past at a metaverse convention I used to be at, and it is fascinating.

If you consider metaverse, it is a buzzword, to begin with. However second of all, it is actual. If you consider their merchandise like LinkedIn, Home windows, Groups, these different issues, they’re all centered on entering into this immersive atmosphere. A whole lot of that’s going to require plenty of knowledge, plenty of cloud infrastructure funding. When you’re having a simulation of their digital world in the true world, and that is all being overlaid speaking real-time, that is quite a lot of infrastructure and communication expertise. So, I believe it is actually thrilling to see Microsoft on the earth heading into this route.

One of many issues that that requires although, as we get extra overlay expertise built-in into our lives, unlocking our passwords, we’re going passwordless, that is quite a lot of AI to detect in case you are who you’re. When you had intent to entry what you are making an attempt to do, requires cybersecurity and THNQ index member. Alphabet not too long ago made the acquisition of Mandiant cybersecurity for $4.5 billion to hitch its cloud computing division. So, as extra property and companies are digitized and automatic, cybersecurity isn’t just a fundamental want for these corporations, nevertheless it’s a aggressive moat, actually, to make sure that their prospects, whether or not it is you and I, or enterprise prospects are assured in capable of proceed working throughout more and more complicated environments. So, the THNQ index captures a number of direct cybersecurity, AI angles by publicity to the businesses similar to Rapid7, Cloudflare, Varonis and Darktrace. So, with that, I’ll move it on to Jeremie.


Jeremie Capron:

Thanks, Zeno. The very last thing we need to contact on in the present day is the non-public aspect enterprise capital funding. Earlier than I do this, I need to remind all people, you’ll be able to ask you questions utilizing the Q&A field on the backside. So, on the non-public aspect, I believe, the one line abstract is that we had a report breaking 12 months in 2021, and the fast decline in tech valuations in public fairness markets is de facto put a damper on public exits through IPOs and significantly specs which have just about disappeared. The funding exercise continues to be sturdy and it is taking place at considerably decrease valuations. I believe it is essential to grasp that on the extent of the increase in 2021, we offered greater than $640 billion invested. That was a report excessive and virtually a doubling 12 months over 12 months. Two thirds of those funds went to late-stage development corporations with very giant rounds pushed by monetary establishments, together with hedge funds, looking for pre-IPO corporations.

I believe that is the place quite a lot of this exercise is slowed in to this point this 12 months. Within the meantime, we noticed early stage funding that was additionally very sturdy final 12 months, however possibly not as excessive as late-stage. When it comes to the place the motion occurred, it is actually fintech corporations that raised probably the most enterprise funding in 2021, adopted by healthcare and eCommerce and transportation. Now, wanting on the first quarter of this 12 months, we see that funding is steadily declined by virtually 20% with the shock within the public fairness markets. The variety of offers, nonetheless, continues to be up 12 months over 12 months, and with so sturdy exercise in cybersecurity, in logistics automation, and healthcare applied sciences. We anticipate that over the approaching month, the slowdown will proceed to have an effect on primarily the late-stage pre-IPO corporations.

We additionally see that investor curiosity stays very sturdy within the areas of automation, particularly options that assist with the provision chain points and the label shortages. With decrease valuations, we see a good outlook for early stage investing. Now, lastly, this is a brief record of among the current offers that we’re watching carefully as they contact on our areas of focus. These corporations will probably come onto your radar as they ultimately go public or get acquired. I’ll spotlight a number of of them beginning with Samsara on the higher proper nook. Samsara is a cloud-based IOT or provide chain software program firm that raised $800 million in an IPO a number of months in the past, $12 billion valuation. Samsara makes cloud-based software program options for the transportation business, the logistics business, the development business and others. What they do is they assist corporations accumulate and handle knowledge, together with gear monitoring, telematics, or how vehicles and fleets of automobiles transfer round, and so they do video analytics utilizing AI and a few extra.

So, Samsara went public on the $12 billion valuation. In slightly below six month, its share at the moment are buying and selling about 50% beneath the IPO worth. Now, one other one is Exotec. Exotec is a warehouse robotics firm that is based mostly in France. I am sorry. They raised $300 million at a $2 billion valuation, that was firstly of the 12 months in January. Exotec makes the Skypod System that may be a warehouse automation system that makes use of stacked beans and robots that may attain as much as 36 ft excessive, and that is used for a really excessive density storage and retrieval, and that participates within the order achievement course of. Exotec is working with among the world’s largest manufacturers in eCommerce, in retail and grocery.

The final one I need to spotlight in the present day is Medable, which has a software program platform for medical analysis in healthcare. In addition they increase greater than $300 million round $2 billion valuation. What Medable does is that this straightforward to make use of software program that connects sufferers and medical groups and medical trial websites to allow medical trials anyplace. So, that is an enormous change for the business that ought to assist the increase in medical trials we’re seeing in the present day with the enlargement of precision drugs and genomics specifically and gene-based therapies. So, in the present day, Medable is already working with over 150 decentralized trials that is distant and onsite trials, and it is the software program that allows this to occur. We expect that is going to vary dramatically the way in which medical trials are carried out going ahead. A lot of the firm’s success has been pushed partly by the COVID-19 pandemic that drove up demand for distant and hybrid analysis settings.

So, with that, I’ll invite Zeno and Nina to hitch me, and we’re going to take your questions. I see that now we have a number of within the queue already. I believe we’ll begin with query round earnings projections, and revisions for the ROBO and likewise HTEC indexes. I believe that is a very essential level as a result of that 30% or so decline within the ROBO and HTEC index is de facto all about a number of, all about valuations. Actually, valuations have contracted by virtually 35% from the excessive. Within the meantime, earnings projections, earnings estimates have barely moved, and we’re coming to the tip of this Q1 incomes season. If we take a look at the three month earnings revisions, so modifications in road estimates over the previous three months, what we see is that they’ve actually barely moved. So, after I take a look at ROBO first over the previous three months, the projected EPS for this 12 months has come down by 1.5%.

In fact, it is a mixture of the higher of surprising outcomes that we noticed general in Q1. As you already know, that occurs more often than not in public equities, the place corporations are available and beat estimates and so they strive and ensure they do not information too excessive. So, we have seen a standard charge of beating estimates. On the similar time, administration groups have clearly turned much more cautious given the modifications within the macro backdrop. So, they’ve tended to cut back their outlook considerably or preserve it. In some circumstances, scale back it, however in combination for ROBO, the EPS estimate has come down by 1.5%, and for HTEC it is 1.8% over the previous three months. So, actually not a lot of a change. If we take a look at subsequent 12 months projections, it is the identical story.

We have now a 1.8% discount within the EPS estimate for subsequent 12 months. So, in fact, something may occur, and the noise round the opportunity of a recession has elevated. Clearly, now we have power costs going by the roof, and traditionally that has tended to result in a extra of a recessionary atmosphere, however that is on the similar time, now we have a really sturdy momentum within the economic system in the present day. If you take a look at the accrued financial savings in the course of the previous two years, and also you take a look at the buyer spending patterns, shopper spending is sustained to extend month over month for the 4 consecutive month. The most recent knowledge level that got here out only a few days in the past was displaying extra of that with April retail gross sales up month of the month.

On the economic aspect, you take a look at the economic manufacturing numbers, they’re nonetheless displaying development and so they’re coming in higher than anticipated. So, I believe, in fact, now we have to be conscious that we may flip into extra of a recessionary atmosphere, however for now that is not the case, and index projections are set in that context. So, I need to give the subsequent query to Nina. I see there is a query across the money move relative to financing wants sooner or later. What proportion of corporations within the HTEC portfolio will want financing to fund development over the subsequent few years? So, Nina, do you need to take this?


Nina Deka:

Yeah, positive. So, we carried out an evaluation simply to maintain observe of the money move healthiness and the money state of affairs of the portfolio. As we talked about earlier, nearly all of the businesses and the portfolio are internet money constructive. However once we take a look at free money move, there are fairly a number of that proceed to be money move unfavourable as a result of these corporations are largely investing of their development in innovation. However once we drill down additional and we take a look at money stability in comparison with the money burn, what we’re discovering is just about 5 to seven of the businesses within the portfolio may want financing within the subsequent 12 months or two, and that is out of about 85 names. So, by way of the p.c about on the excessive finish, about 8% may doubtlessly want extra financing. So, once we look additional of the composition of these explicit corporations, it comprised largely of corporations like Guardant, Natera, Editas, Destiny, and these are corporations in our genomics and our precision drugs sub-sector.

So, once more, corporations which can be investing closely into their R&D, their medical trials on applications which have a really excessive income market potential. To present you an instance, Guardant proper now’s the world is awaiting knowledge that is anticipated later, doubtlessly in September, October timeframe on one of many largest ever medical trials taking place within the genomics subject. They’re evaluating to see whether or not or not you’ll be able to draw blood. So, that check is named liquid biopsy with the blood draw, a routine blood draw that you just get at your regular physician appointment to display screen for colorectal most cancers. The rationale why this is able to be revolutionary is as a result of, proper now, the display screen course of for colorectal most cancers is a bit of bit extra tedious both by colonoscopy or by stool assortment at dwelling that you’d mail in. So, when you’re having a routine blood draw, have them tack on a check doubtlessly for colorectal most cancers display screen. Proving that that may work goes to open up an enormous market for a lot of, many billions of different {dollars} of screening for different potential forms of most cancers.

There are quite a lot of corporations which have invested closely on this liquid biopsy house over the past couple years. Within the HTEC portfolio alone, we noticed over $15 billion value of M&A. Illumina acquired Grail. There’s simply quite a lot of M&A folks going after this expertise validating its market alternative. So, anyway, I carry up Guardant as a result of they’re considered one of these corporations that will doubtlessly want to lift within the subsequent couple years, however they’re engaged on one thing revolutionary, and early knowledge is definitely displaying that this may very well be fairly promising.


Jeremie Capron:

Thanks, Nina. Possibly you’ll be able to remind us the share of HTEC corporations which can be worthwhile or money move constructive, which I imagine is the overwhelming majority of what is within the portfolio. What kind of corporations are usually loss making in the present day with expectations of future income by way of what sort of work they do?


Nina Deka:

Yeah. So, a few third of the corporate has unfavourable earnings, and a few quarter of the corporate as of calendar 12 months 2022 is money move unfavourable. So, once more, these are largely comprised of possibly the small mid-cap names within the portfolio, and so they’re diversified, however largely fall into that genomics and precision drugs sub-sector. We do have quite a lot of corporations which can be greater than half the portfolio about 51% of the portfolio is large-cap. These are single digit, excessive single digit, low double digit growers, very steady corporations with constructive earnings, corporations like Edwards Lifesciences, Boston Scientific, and many others. So, quite a lot of actual steady worth oriented names within the portfolio, however it’s diversified and it does include 49% small mid-cap. Of these, like I mentioned, a few quarter are cashflow unfavourable this 12 months.

Lots of them are on observe to money move break even. For instance, Natera, one of many corporations I discussed. When you take a look at their money stability, merely $1 billion, however a excessive money burn charge, nonetheless, they proceed to have an enhancing reimbursement atmosphere. They preserve getting authorization from the facilities for Medicare and Medicaid that extra of their testing goes to be reimbursable. So, what this implies is checks that they’ve already been doing and never producing quite a lot of income on are going to generate extra income. A whole lot of that’s going to proceed to drop to the underside line. So, quite a lot of proper issues should occur, however ought to this firm execute on plan? They might really flip money move break even within the subsequent couple years. Does that reply your query, Jeremie? Or did you will have one thing else in thoughts?


Jeremie Capron:

No, that is nice. Thanks. Shifting on. We have now a query about, how the funding methods have modified with market circumstances by way of avoiding unprofitable or excessive P/E corporations? That is query. I’d begin by reiterating that we design our methods for long-term investments, and we do not change our fashion together with the market fluctuations. Actually, now we have an embedded mechanism within the index building course of that ensures that each quarter, we rebalance. So, each three month, we find yourself promoting corporations which have seen their share worth transfer up probably the most, and we purchase those who have come down probably the most, so long as, in fact, they nonetheless qualify for the index, and we primarily assume they’re nice long-term investments. So, you will have that smoothing or threat administration mechanism that is embedded in our course of.

However I’d say that, basically, once more, we do not discover quite a lot of unprofitable corporations in our thematic index portfolios. On the subject of ROBO, lower than 5% of the ROBO members are loss making, 95% are worthwhile. In lots of circumstances, extraordinarily worthwhile. These corporations have a tendency to attain very excessive on the standard issue. They’ve reality margins and excessive return on capital. It is a bit of totally different in AI, and Zeno talked about that now we have 11 out of 72 members within the AI portfolio which can be misplaced making, so it is a bit of extra. In healthcare applied sciences, it is much more, simply round 30%. However, once more, robotics automation, it is stomach any. Now, by way of the excessive P/Es, that is query, and I believe you may discover it shocking that, in actual fact, now we have extra corporations in ROBO which can be buying and selling on very low multiples than now we have corporations which can be buying and selling on excessive multiples.

The metric I am going to use right here is that gross sales a number of, the EV-to-sales the place now we have about 10 corporations or so. In ROBO, they’ve a double digit EV-to-sales a number of, so each 10X, which one may qualify as costly. However now we have greater than a dozen which can be buying and selling beneath one occasions EV-to-sales, and that’s exceptional. These corporations are usually concerned in industrial finish markets. There is a good member of Japanese manufacturing facility automation specialists which have a excessive publicity to China. Whereas, we have seen a renewed lockdown state of affairs that has severely impacted the provision chains and the economic finish markets. That is most likely why these corporations are buying and selling at comparatively distressed ranges proper now, for worry that the state of affairs may deteriorate within the China market.

General, our view is that the most effective time to put money into applied sciences when the valuations are low. If in case you have an extended sufficient time horizon, it is a superb recipe. So, yet another query across the M&A market. I believe, Zeno, you possibly can take a shot at that. How will we see the general public market de-rating impacting the M&A market? Is {that a} maintain or only a momentary correction?


Zeno Mercer:

Yeah. There’s positively a correlation with M&A exercise and the re de-rating and the general public fairness market sentiment. Regardless of what brought on analysis, contraction corporations are evaluating their strategic strikes. On the opposite aspect, you will have corporations which have giant catch stability sheets which can be nonetheless capable of make acquisitions throughout this time that they’ll make $10 billion acquisitions for a few of these corporations and that would not affect them that a lot. Now, they could wait, they may be holding off, as we have seen, we have had zero like M&A has slowed down within the THNQ index, for instance, on each ends, each buying excluding Activision Blizzard and among the increased ones. These are long-term strategic performs which can be elementary to the corporate.

On the opposite aspect, since you may be seeing much less inventory compensated buyouts as a result of they’re at depressed inventory valuation, so that they’d slightly be shopping for again their inventory than promoting an organization with depressed firm shares. So, there’s really an impetus that you just may see with all the company VC that is occurred. Company VC is at its peak, it may keep and continue to grow, however there’s so many strategic acquisitions which have been blade on the market that you just really may see quite a lot of money stability sheet acquisitions for these AI and robotics and different corporations as a result of that strategic implementation. If there’s an organization that may drive worth for these corporations over the long-term, and so they’ve made an funding, they will purchase it. So, if we’re at zero now, comparatively, the one manner we will go is up from right here.

However, I believe that is the place we’re at, sentiment type of improves. Properly, these corporations, are usually not evaluating M&A alternatives. With Ukraine and simply China provide chain, I believe there’s simply been a pair issues that folks have been cautious about. However, in any other case, I believe that is only a core a part of enterprise and there are quite a lot of acquisitions final 12 months. So, a short lived pause simply to combine a few of these M&A acquisitions additionally make sense. So, there’s a lot of elements there, however I do assume it’s going to ramp up small mid-cap after which giant corporations with stability sheets could make strikes regardless.


Jeremie Capron:

Okay. Thanks, Zeno. I believe we have coated all of it. So, I need to thank everybody for becoming a member of us in the present day and be at liberty to achieve out through our web site, if you wish to ask the analysis staff any query. You may also join biweekly analysis e-newsletter, and we very a lot sit up for chatting with you once more quickly. Have an ideal day. Everyone bye-bye.



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