- While Big Tech companies are investing heavily in robotics and AI, they will not be the only winners
- Investors can gain broad exposure to these long-term structural trends through funds
Robotics and artificial intelligence (AI) are often associated with science fiction and futuristic visions of how we might one day live and work. But these aren’t just distant ideas of the future, and haven’t been for some time.
The first industrial robot was installed in a General Motors (US:GM) factory back in 1961, and the automotive sector has pioneered the use of such technology throughout manufacturing assembly lines over the ensuing decades. With the development of machine vision and learning, advances in both software and hardware mean that robots are becoming increasingly sophisticated. And as costs fall and internet connectivity improves, their application across industries is growing.
“Robotics is probably the most developed theme within the automation and artificial intelligence bucket,” says Nick Williams, an investment analyst on the Polar Capital Automation and Artificial Intelligence Fund (IE00BF0GL543). “The idea of robotized and automated manufacturing lines has been around a long time.”
But he points out that what is new, is “how robotics is becoming more integrated with artificial intelligence, which is a very nascent industry compared to where it could be”.
We have already made strides in AI which, more than simply automating a process, means that a computer or machine is able to mimic the capabilities of the human mind. Apple’s (US:AAPL) voice assistant Siri and Amazon’s (US:AMZN) counterpart Alexa both employ AI technology, while Alphabet’s (US:GOOGL) Google uses AI to improve the performance of its eponymous search engine.
Still, there is a long way to go, with the potential for AI to diagnose diseases, drive our cars and revolutionise how we produce our food. IBM (US:IBM) characterises AI as one of the “next great shifts in the technology landscape”, and says that the current deployment of AI in enterprises remains in the single digits. As robotics and AI look set to penetrate virtually every sector of the economy, investors could be tapping into a multi-decade opportunity.
As factories automate their processes, manufacturing has thus far been the main driver of demand for robots. Bank of America predicts that as industrial robots become cheaper and more capable, the global installed base could double between 2019 and 2025 to more than 5m units. Rising uptake should continue to benefit the likes of Swiss robotics giant ABB (CH:ABBN), industrial automation specialist Rockwell Automation (US:ROK) and machine vision business Cognex (US:CGNX).
But demand for robots outside of manufacturing is also rising.
“Manufacturing was the sweet spot from 1980 until 2010. And then over the past decade, that shifted into logistics and warehouse automation,” says Jeremie Capron, director of research at ROBO Global. “Our research leads us to the conclusion that healthcare is the next big one.”
The deployment of automation has been accelerated by the pandemic, most notably in the logistics sector to keep pace with soaring e-commerce demand. The online shopping boom has ramped up the pressure to improve speed, output and supply chain efficiency.
“What's happening in logistics and warehouses has been one of our favourite themes for the last several years, but it's really come under the spotlight now,” says Capron. “Aggressive investment in automation tech for warehouse logistics goes all the way from top players like Amazon (US:AMZN) down to much smaller firms, because it's become a de-facto standard that you need to have to be competitive.”
Logistics landlord Tritax Big Box (BBOX) notes that 55 per cent of its portfolio is now automated, and its tenants include Amazon and online grocery retailer Ocado (OCDO). The latter has been expanding into the warehouse automation sector, purchasing two US robotics companies for close to $300m (£213m) last year.
Healthcare: AI's next big battleground
Robot doctors may be some way off yet, but the healthcare industry’s inefficiencies and slowness to adopt new technology means that it is ripe for automation. While there are valid quality, safety and data privacy concerns regarding modernisation efforts, Big Tech isn’t letting the opportunity go to waste.
Amazon is pushing into online pharmacies and telehealth, Apple is facilitating the collection of healthcare data via its devices, and Alphabet (US:GOOGL) recently unveiled an AI-powered tool to help identify skin conditions.
Meanwhile, Microsoft’s (US:MSFT) $19.7bn deal to acquire Nuance Communications (US:NUAN) could be a harbinger of further M&A to come. Nuance specialises in conversational AI software that can recognise, transcribe and analyse speech. Its technology is used by almost 80 per cent of hospitals in the US and helps automate the notetaking process during patient consultations, reducing the time doctors spend on administrative work.
Nuance is currently a top 10 holding of the ROBO Global Robotics and Automation Index (US:ROBO) – which UK investors can track via the L&G ROBO Global Robotics and Automation UCITS ETF (ROBG) – and Capron says that the acquisition is “really interesting, because suddenly the market realised the value that companies can ascribe to that tech”.
ROBO is comprised of more than 80 stocks, and while some names such as Nvidia (US:NVDA) are familiar, Capron points out that, overall, there is little overlap with broader equity indices such as the S&P 500. He suggests that a lot of the companies are therefore “flying under the radar. They are not understood as a big AI or robotics enablers, but very large corporate interests see that value, and they have already paid top dollar for it.” This means there could be plenty more takeovers ahead in this space.
Elsewhere in the healthcare sector, AI is being developed to enhance diagnostics and develop drugs, and also to further advance robotic surgery. Fund manager favourite Intuitive Surgical (US:ISRG) is a pioneer in robotic-assisted surgical systems that enable less invasive procedures, and also offer surgeons greater precision, flexibility and control.
From EVs to AVs
While electric vehicles (EVs) have yet to fully take off, there is already a debate about the next stage of road transport – autonomous vehicles (AVs).
Some see the shift to AVs as a technological inevitability – that one day all electric cars will be autonomous and vice versa. Tesla’s (US:TSLA) chief executive Elon Musk declared last year that “electric autonomy is absolutely the future, no question…I think 10 years from now, almost all new cars produced will have full autonomy capability.” He estimates it will take another 20 years for the existing car fleet to be fully replaced by autonomous vehicles.
It’s a typically bold prediction from Musk, but right now it’s hard to envisage a road full of driverless cars where we can all kick back and enjoy the ride. While Tesla is promising 'full self-driving’ capability, its technology seems to be some way off the stage where its cars can drive without human supervision.
Alphabet’s Waymo business is currently running an autonomous ride-hailing service with no one in the driving seat. But this is within a defined geographic area – namely Phoenix, Arizona. Before AVs are able to take us anywhere we desire with a simple command, companies will have to collect billions of miles’ worth of data.
Assuming this can be done in a timely fashion – through both real life and simulations – there are still considerable barriers to mass adoption. These include cost, regulatory hurdles, safety concerns and questions over who is liable when an accident occurs.
Ken Goldberg, professor of industrial engineering and operations research at UC Berkeley, notes that the stakes are much higher when it comes to getting AVs right. “In logistics, the consequence of dropping a package is undesirable because an item may be damaged or broken,” he says. “But that’s not nearly as undesirable as an error in a self-driving vehicle that leads to a crash.”
Still, there are many degrees of vehicle autonomy before fully driverless cars and we already have some of these functions through ‘advanced driver assistance systems’ (ADAS), such as adaptive cruise control and automatic parking.
But is the AV trend worth investing in now? The good news is that you can cover your bases with companies exposed to EVs. There is even more technology packed into AVs, and semiconductor manufacturer Infineon (DE:IFX) estimates that fully autonomous vehicles could have between $1,150 and $1,250 of semiconductor content per car, versus $160 to $180 with the current level of autonomy.
Meanwhile, one-stop testing shop AB Dynamics (ABDP) should find its services in higher demand on the journey towards AVs, particularly as it has amassed the industry’s largest digital library of the world’s roads.
Aptiv (US:APTV) is an industry leader in ADAS technology and develops the radars, cameras and sensors that enable vehicles to monitor their surroundings. It bills itself as “the brains behind the future of mobility”. The company is a holding of the Rathbone Global Sustainability Fund (GB00BDZVKD12), and manager David Harrison says that it is “essentially the nerve centre of an EV, but also, as we move towards more active safety and autonomous vehicles, Aptiv has a very high and defendable market share”.
More chips, please
As with most innovations these days, semiconductors will be key to enabling the structural shift towards automation and AI, and the long-term demand for chips should help smooth out some of the industry’s cyclical variation. Semiconductors provide the computing power required to process vast amounts of data for machine and deep learning, and this trend is necessitating ever smaller and more complex chip designs.
We’ve previously highlighted a number of attractive investments in the semiconductor space, including materials supplier Entegris (US:ENTG), equipment maker ASML (NL:ASML), and graphics processing unit (GPU) specialist Nvidia.
Stewart Heggie, investment specialist at the Scottish Mortgage Investment Trust (SMT), argues the importance of Nvidia to the AI industry “cannot be overstated".
"Its GPUs have evolved into a computerised brain, straddling the exciting intersection of virtual reality, high-performance computing and artificial intelligence," he says. "GPUs are the single most important items in developing AI applications.”
Nvidia’s AI capabilities could be further boosted if its proposed $40bn takeover of chip designer Arm can overcome regulatory scrutiny. It is hoping that the merger will create “the premier computing company for the age of AI”.
Look beyond Big Tech
Because the technology giants are investing in robotics and AI, they are often prominent holdings of a lot of funds operating in this space, including the Polar Capital Automation and Artificial Intelligence Fund, Pictet Robotics Fund (LU1316549283) and Sanlam Artificial Intelligence Fund (IE00BYPF2Z68). But these companies are not the only, or necessarily best, way to play this space.
“Big tech is one of the top investors in robotics and AI. But, in most cases, it drives a very small portion of their revenue,” says Capron. “So, they're big investors, but they're not a great way to invest around this theme, because you're diluted into everything else that they do.”
Williams believes that Big Tech will still continue to have a role. “But does that mean that they will be the only winners? No, I don't think so,” he says. “We're seeing almost a democratisation of artificial intelligence as more and more companies are now partnering or building up their own AI assets.”
Investing in this space isn’t without risk – the pace of technological development means that the leaders of today may not stay at the top of the pile, and some areas such as manufacturing are more cyclical and commoditised.
There is also a question of valuation, as technology-orientated businesses tend to command premium ratings – Nvidia, for example, is currently trading at an eye-watering 44 times consensus 2022 earnings. Robotics and AI stocks have been gathering momentum, although the recent tech sell-off and rotation from growth to value have seen some earnings multiples compress, potentially offering an attractive entry point.
It’s worth bearing in mind that for all the progress that has been made, we have yet to fully unlock the potential of robotics and AI, and all signs point to this being more than just a passing fad. The robots are indeed coming. So, when it comes to high-quality companies such as Nvidia, the long-term growth opportunity on offer could well justify the price tag.