Don’t let the robotics industry’s near-term weakness distract you from its long-term potential, particularly when it comes to industrial software companies.
Feb. 20, 2020
This article was originally written by Keith Noonan of The Motley Fool
Almost a couple of months into 2020 and its time to take stock of trends in the robotics and automation industry. Is it time to buy into the sector and which stocks are set to outperform in the near and long-term? Let’s take a look at recent developments.
Robotics stocks
For reference, we’ll focus on some of the companies previously outlined as attractive for long-term investors interested in the robotics industry. Namely, electrification, robotics, and automation company ABB(NYSE:ABB), and industrial software companies Dassault Systemes (OTC:DASTY) and PTC(NASDAQ:PTC).
While all of the stocks are still attractive, there are reasons to be concerned about near-term weakness in the robotics and automation market. On a more positive note, though, recent evidence from PTC, Siemens (OTC:SIEGY), and Dassault should firm up conviction that the industrial software sector can outperform over the long-term. Here’s the lowdown.
Automotive and electronics industries remain weak
If you invest in the robotics and automation industry, you must appreciate that its near-term fortunes will be broadly tied to conditions in the automotive and electrical/electronics industries. As early adopters of automation technology, they are responsible for an inordinate share of the revenue of companies that service the industry.
Unfortunately, thanks to a combination of globally declining light vehicle sales and economic weakness in Asia, the robotics industry has been disproportionately hit by the slowdown in the industrial economy. These considerations are apparent when looking at the earnings of one of the big four robotics manufacturers, ABB.
As ABB Chief Financial Officer Timo Ihamuotila said on the company’s recent fourth-quarter earnings call: “Orders for Q4 were 18% lower, reflecting a very challenging market and a tough comparison base. As already noted, the robotics industry continues to face headwinds in the traditional automotive and auto-related industries, particularly in China. Revenues declined 10% impacted by lower book and bill.”
Throw in the potential impact of COVID-19 on the Asian economies — and specifically on their manufacturing sectors — and the near-term outlook for robotics manufacturers doesn’t look great.
Industrial software to the rescue
That said, there are sub-pockets of growth in robotics and automation, and there’s evidence to suggest they will experience ongoing strength in 2020. Industrial software companies such as ABB’s partner Dassault, PTC, and the software arm of Siemens have reported strong results.
The divergence in the performance between automation and the software that helps manage it can be seen in the recent results from the largest automation company in the world, Siemens. In addition, management disclosed that software orders increased by 33% in the quarter.
| Siemens Digital Industries Segment | Q1 2020 | Q1 2019 | Change | % Change |
|---|---|---|---|---|
| Software | 1.01 billion euros | 935 million euros | 79 million euros | 8.4% |
| Product | 2.75 billion euros | 2.92 billion euros | (176 million euros) | (6%) |
| Total | 3.76 billion euros | 3.86 billion euros | (97 million euros) | (2.5%) |
Meanwhile, Siemens’s rival in industrial software, Dassault Systemes, reported 17% growth in software revenue in constant currencies in the fourth quarter, and management predicts it will grow new licenses by 5% to 10% in 2020. In addition, product lifecycle management (PLM) software company PTC soared in January on the back of an 11% increase in its annual recurring revenue (ARR) growth in its first quarter of 2020 — management hiked guidance and now expects 14% to 16% growth in ARR for 2020.
Whichever way you look at it, the industrial software sector is demonstrating that the improvements generated by digitalizing automated factories are tangible and will continue to be invested in, even in a period of weak end demand.
Using industrial software, companies can better manage their physical assets, such as robots and automated process, by using IoT solutions such as PLM or “digital twinning” — creating an accurate digital simulation of a physical asset which can be used to model, predict, and improve the real asset’s performance.
In fact, in a weak-demand environment, companies may well be induced to increase their adoption of such technology in order to cut their costs. In other words, the sector has enough secular growth drivers in order to offset the cyclical weakness in manufacturing.
Stocks to buy?
Investors focused on the long-term future of the robotics industry and its applications are likely to stick to some of the previously identified names for their portfolios. However, investors concerned with ongoing cyclical weakness in key robotics/automation end markets like automotive and electronics might want to consider buying stocks like Dassault and PTC, as they are starting to demonstrate that they can grow significantly through the economic cycle as well.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold no positions in companies mentioned above. Read our full disclosure policy here.
Lee Samaha owns shares of Siemens AG (ADR). The Motley Fool owns shares of and recommends Cognex. The Motley Fool recommends PTC. The Motley Fool has a disclosure policy.