As the global economy puts the worst of Covid-19 disruptions behind it, one area that stands to see a long-term benefit is robotics and automation.
A boom in ecommerce and work from home trends have created demand for a faster and more efficient movement of goods in and out of warehouses. Fewer workers has meant more interest in automated systems and robots to bridge the gap.
This means a record year for many companies that sell automation software, semiconductors and combine them into platforms used to manage robotic systems. For investors, it means an ongoing opportunity.
“We have seen 10 years of growth pulled forward into a 10-month period,” says Nicholas Mersch, an associate portfolio manager with Purpose Investments Ltd. in Toronto.
“Will it pull back a bit? Yes. But you have to look at what is momentary, versus what is long term,” says Mr. Mersch, who co-manages the Purpose Global Innovators Fund. “These are structural shifts and changes in consumer behavior.”
A shortage of workers has spread from such areas as logistics and shipping healthcare. This includes hospitals, clinics and other settings where pandemic burnout has taken a toll on staff.
These staffing pressures will ease, observers say, once support programs end and higher vaccination rates reduce pressure on hospitals. But the unpredictability of the last two years has not been lost on employers, says Hans Albrecht, vice president, portfolio manager and options strategist at Horizons ETF Management (Canada) Inc. in Toronto.
“This year, anybody thinking about automation in warehousing and industrial is saying: ‘Well, this is the time,’” he says.
The demand for surgical and healthcare robots has been more uneven for a few reasons. One challenge has been a semiconductor shortage and another has been elective procedures that have been deferred to cope with pandemic crises. Mr. Albrecht says medical automation companies are appealing to chip suppliers with a “support health and saving lives” message to get their chips.
For example, Intuitive Surgical Corp., (NDQ:ISRG), the industry leader in robotic systems, has had a seesaw year with its shares 10 per cent off their high. Intuitive’s DaVinci system was the first US Food and Drug Administration (FDA) approved for robotic-assisted, minimally invasive surgical system. The company says DaVinci has performed over 8.5 million procedures.
Demand for industrial automation and warehousing robots shows no sign of easing as the ecommerce boom gets stronger.
“All things point to a record year for the industry,” Mr. Albrecht says. “It’s across the board: Automotive, industrial and warehouse settings, as well as in agriculture, construction, healthcare, retail and restaurants.”
Horizons launched Canada’s first ETF in this space in 2017 with the Horizons Robotics Automation Index ETF .
The Purpose and Horizons funds have different geographic footprints and focuses. The Purpose fund was launched three years ago, is actively managed and weighted towards application and systems software. Almost all of its holdings are in the US or Canada.
Its top two are Crowdstrike Holdings Inc. (NDQ:CRWD) a cybersecurity software firm whose products prevent any breaches on endpoint devices. Unity Software Inc. (NYSE:U) provides tools that allow video game creators to streamline the development process. They have 2.8 billion monthly active end users, and 61 per cent of mobile game developers use Unity, Mr.Mersch says.
The largest component in the Horizons ETF is semiconductors and 80 per cent of its holdings are in the U.S. and Japan. It is passively managed and the top holdings are graphic chipmaker Nvidia Corp. (NDQ:NVD) and Keyence Corp., a Japan-based manufacturer of automation sensors and vision systems. Intuitive Surgical is its third-largest holding.
Mr. Albrecht says the Association for Advanced Automation reports a 40 per cent year-over year increase in the sale of robotic systems with a 35 per cent increase in value shipped.
“[Factory automation]is a sleeper category within this theme and overlooked in terms of the low hanging fruit of big data, cybersecurity and semiconductors.”
Mr. Mersch points to grocery warehousing as an example of where software and hardware advances are combining to create powerful solutions. Groceries are a high volume, low margin business, where the products are perishable.
Ocado Group plc (NYSE: OCDO), a UK online grocery logistics firm, has been working with US grocery store chain Kroger Inc. since 2018 to improve the so-called pick and pack warehousing function, which moves produce and other goods from warehouse to truck. Rapid improvements in application software and image recognition and optics is creating leaps in functionality.
“This is an example of a technology that is maturing,” Mr. Mersch says.
He believes the semiconductor leaders will move towards integrating their chips with a proprietary system that creates a more powerful in combination, pointing to Nvidia as an example.
“They have made themselves a platform rather than a commodity, marrying the hard science of hardware with a software component that is glue of the overall offering.”
He believes automation technology will continue to spread rapidly.
“After Covid every company is going back to their cost structure to see what’s working. Software solutions and robotics solutions are the last thing being cut. People will come back, but robots have proven their value.”