Investing in Robotics Companies and Stocks
TABLE OF CONTENTS
- Why Is Robotics Important?
- Where is Robotic Technology Today?
- Drone Stocks and Companies
- Investing in Autonomous Vehicles
- Investing in Industrial Robotics
- Robots in Healthcare
- Robots for Consumers
- Robotics ETFs
The first time the word “robot” was used was when Karel Capek introduced it in his 1920 hit play “RUR,” or “Rossum’s Universal Robots.” An article by NPR tells us how the play was about a company called “Rossum’s Universal Robots” that was mass-producing workers with no soul, what we might call humanoid robots today. They couldn’t have feelings. They couldn’t sexually harass each other. They couldn’t complain about working overtime or go on smoke breaks. They ended up selling by the loads in a similar way to the growth of industrial robots seen today.
Why Is Robotics Important?
It’s easy to visualize today – in much the same way as Karel Capek did in 1920 – how automated machines replacing humans would benefit a company’s operations. They even have “lights out factories” now. Why turn on the electricity when nobody is in the building? There are also environmental factors driving adoption such as labor shortages and pandemics that require people to stay at home. Robotics is becoming increasingly important because the companies using them are gaining a competitive advantage. Their competitors need to use them as well if they hope to compete.
Where is Robotic Technology Today?
Robotics applications are growing in popularity because of technologies like machine learning that help the robots work more like humans, perhaps handling unexpected exceptions without just ceasing to operate. Today’s robots aren’t just machines engineered to perform a specific task, they come in all sorts of form factors, and are even able to be retrained if different as new use cases come up. Ideal use cases are the “dull, dirty, and dangerous” jobs that most humans don’t want to do, and which usually pay a danger premium. Next on the list is automating blue-collar jobs like construction or farming. We have robots laying bricks and robots butchering animals. There are robots that pick weeds, and autonomous robots that move potted plants around in nurseries. In brick-and-mortar retail, you’ll find robots roaming the aisles of Walmart taking inventory. At night, robot janitors wander the same aisles cleaning floors.
The hospitality, service, and retail industries are being affected by robots as well. Restaurants are being transformed by “kitchen automation robotics.” In the back of the house, you have robots flipping burgers. In the front of the house, robot baristas serve coffee. You might not see robots serving hamburgers at McDonald’s, but you will see all forms of automation used to make fast food faster.
After blue-collar jobs, it’s on to the white-collar jobs. We now have robot scientists performing lab experiments in large automated laboratories which talk to the cloud. From Canada to Israel, plenty of venture capital dollars are flowing into cool and exciting robot startups. There are also plenty of publicly traded pure-play stocks for retail investors. In order to better evaluate the investment opportunity, we broke up robotics into a number of niches as follows:
- Autonomous Vehicles
- Industrial Robots
- Robots in Healthcare
- Consumer Robots
Before we dig into these five areas of robotics, it’s important you understand the risks involved. If you are relatively new to investing, we recommend that you read our Complete Guide to Buying Stocks for Beginners before continuing. Even advanced degrees in finance don’t cover the many pitfalls out there that can befall first-time investors.
Now, let’s start with talking about drones.
Drone Stocks and Companies
Drones, also known and Unmanned Aerial Vehicles (UAVs), were first developed and deployed by the military in the early 1900s to provide practice targets for training military personnel. Further advances in technology allowed the development of more serious types of unmanned aircraft for assault and reconnaissance purposes that didn’t risk the lives of the crew in military engagements.
In the 1960s, breakthroughs in transistor technology meant that, for the first time, miniaturized radio-controlled components were available to customers at a reasonable cost. As a result, flying RC planes became a popular hobby for the Americans, something which might have been the first manifestation of “consumer drones.” Then powerful lithium batteries emerged, and the consumer drones you see today began emerging in the form of vehicles that could not just fly but hover while carrying miniature video cameras. As more functionality gets to drones, the use cases increase.
Chinese firm DJI is the largest manufacturer of consumer and commercial drones, catering to a diverse clientele of users from hobbyists to professional photographers. There are also racing drones for the gamer types and even drones that carry people. Companies like EHang (EH) are working on designing drone airplanes which are better described as unmanned solutions for urban air mobility.
In addition to unmanned aerial vehicles, there are other unmanned vehicles that might not fly, but would still be considered “drones.” Underwater drones, drone cargo ships, and ground-based mobile security solutions would all fall under our definition of drones, whether they are autonomous or operated remotely. That element of autonomous behavior is why we would also consider drones to fall under the category of robots. The nomenclature can get confusing at times, but it doesn’t really matter. What matter is opportunity for investors to make money in the burgeoning “drone industry.”
Drones are usually categorized into military, commercial, and consumer segments which neatly cover most of the current use cases. With few exceptions, military drone applications are largely under the domain of large defense contractors. Let’s start by looking at commercial use case for drones, perhaps the most talked about being the “drone delivery” use case.
The biggest impediment to the adoption of drones for delivery might be regulatory. A startup called AirMap has developed an air traffic management systems for drones which helps drone operators make sense of all the rules and regulations that differ by country and region. While plenty of startups are working on drone delivery solutions, adoption in any locale hasn’t emerged at scale. Large corporates also have skin in the game like Google subsidiary Wing which became the first operator to receive FAA approval for its commercial service late 2019. Amazon is also expected to be at the forefront of drone delivery development given how much stuff they deliver.
The first drone deliveries we saw back in 2016 – Flirtey’s Slurpee delivery or Amazon’s pilot flight – made for some great buzz but most places in the world you won’t see any drones zipping around with merchandise. One exception to that rule is in harsh environments. Silicon Valley startup Matternet has been testing its fleet in the field by delivering medical supplies in harsh environments like Haiti, Bhutan, the Dominican Republic, and Papua New Guinea.
Drones don’t just deliver things by air, there’s also ground delivery drones which are addressing the same use case – what they’re also calling “last mile delivery.” Startups like Starship Technologies have managed to gather sizeable funding rounds in an attempt to augment human delivery drivers with mobile robotics solutions. With the emergence of the global pandemic, the use case for drone deliveries has become more compelling, something we covered in a piece titled Contactless Drone Delivery Companies Close to Scaling.
The jury is still out on what type of drone delivery model will be adopted at scale, if any. For retail investors, we haven’t seen any pure-play opportunities to invest in drone delivery. We’ve talked before about why we think Canadian firm Drone Delivery Canada Corp (FLT) isn’t a company investors should gravitate towards.
While drone delivery tries to figure itself out, industrial drones are another use case under the “commercial” category. For example, industrial inspection is a cumbersome and resource-heavy task when done by humans, but a breeze for drones. Other niches including providing aerial information, black boxes for drones, or imagery-as-a-service. Loads of startups are focusing on aerial imagery and mapping, and there’s even a publicly traded drone imaging stock – AgEagle (UAVS) – though the stock continues to plummet, perhaps because they haven’t been able to realize any meaningful revenues yet. The company is now pivoting towards hemp farming and the “drone-enabled package delivery market opportunity.”
Another company that’s addressing industrial use cases with a focus on autonomy is Skydio which is developing drones for military applications, such as reconnaissance, search and rescue, and security. Another startup called Ware is using Skydio’s drones for better warehouse management.
Military and Security Drones
Military use cases were the original drivers for the existence of drones (much like in the case of the Internet itself). Military robots of the future won’t just look like humanoid Terminators, they’ll come in all shapes and sizes, like the Titan Modular Unmanned Ground Vehicle below.
The military use of drones is growing at an unprecedented rate in the U.S., and one stock to play that trend with is a pure-play military drone stock called AeroVironment (AVAV). Or you can invest in the large defense contractors where drones only comprise a small fraction of their overall revenues. The other opportunity is security drones for civilian use cases such as replacing rent-a-cops.
With 1.1 million people getting paid close to $30,000 a year as security guards in the U.S., back-of-the-napkin math tells us that the annual cost of guarding things sits at around $33 billion a year. That’s why there are a wide variety of drones and robots taking over these tasks. Besides perimeter surveillance and alerting flesh-and-blood security personnel, they can also be used to patrol large swaths of land or even act as lifeguards. Of course, round-the-clock surveillance means that battery swapping needs to take place “on the fly.” One startup that builds such turnkey solutions with battery swapping stations is Airobotics.
Another security consideration is drones themselves which leads to the development of anti-drone technologies. Drones chasing drones, sensors overtaking and landing trespassers, and trained birds hunting down drones are all anti-drone methods startups are experimenting with. Two anti-drone companies also had IPOs on the Australian Stock Exchange. While DroneShield (DRO) is still listed, Department 13 delisted and went back to private ownership.
Consumer Drones and Other Types of Drones
The third main category for drones is “consumer drones” where China’s DJI, a private company, leads the pack. Challengers are working on their own turnkey solutions or selected niches in the value chain such as autonomous surveying or surveillance. Crowdfunding seems to be the funding method of choice for manufacturers of small, low-cost UAVs.
Underwater drones and drone ships enabled by satellites are just two additional examples that stretch the definition of drones. The same is true for autonomous robots, jetpacks, and flying motorcycles. Whatever names we choose to use, terminology matters little when it comes to investing in a growth opportunity like drones.
Where Are the Drone Stocks?
Pure-play drone stocks are hard to come by. Search for the term “drone stocks” in Google and you’ll see names like Boeing, Northrop Grumman, Lockheed Martin, Amazon, Google, Sony, Microsoft, and Nvidia. It’s the whole “invest in everything with Google” phenomenon.
We’ve been on the lookout for publicly traded drone stocks for five years now, and found a handful of lesser-known stocks, none of which were appealing to us as investors.
- Oceaneering International (OII): Manufacturer and operator of underwater robots, mostly used for services around oil drilling. Heavy exposure to the energy sector.
- Delta Drone (ALDR:FP): Tiny French commercial drone company selling drones-as-a-service and now merging with another company as their share price slides into oblivion.
- Parrot (Parro:FP): French wireless products manufacturing company that pivoted towards drone manufacturing. Revenues have done nothing but plummet over the past four years.
There were plenty of gutless wonders we came across over the years. We questioned Mota Group’s leadership team and lack of notable backing when they had their IPO, and we’re not surprised to see it ended in disaster. Over-the-counter (OTC) stock Drone Aviation Corp which was throwing off red flags left and right has since pivoted into 5G (surprise, surprise). InvenSense never became a pure-play drone stock and has since been acquired. GoPro also failed to successfully get into the drone business.
Plenty of drone startups failed too. High-flying Silicon Valley startup 3D Robotics took in $99 million in funding, yet the debut of their first mass-market drone was a failure, thanks to missed deadlines and buggy components. The company has since pivoted into other drone-related activities. Airware was another drone startup that blew up after taking in $118 million.
The drone market remains in private hands for now, while startups try to challenge market leader DJI, currently the 11th largest unicorn in the world with a valuation of $15 billion.
Investing in Autonomous Vehicles
Levels of Autonomy
Autonomous vehicles (or driverless cars) are an overlap of a number of disruptive technologies. They need computer vision and other sensors to navigate, artificial intelligence to make sense of the big data input, and IoT connectivity to have their systems functional at all times. We classify autonomous vehicle technologies under robotics because true autonomy means no driver is needed at all. Essentially, self-driving cars and other autonomous vehicles are robots that carry people around – the flying cars we’ve all been waiting for.
Different levels of autonomy help us understand how driverless cars will work and what is needed to ensure safe and dependable operation. Here are the different levels of autonomous vehicle development courtesy of IEE Spectrum:
Cars today such as Tesla’s vehicles are generally considered Level 2 autonomy. Speaking of Tesla, some of the most bullish price targets for Tesla are based on the belief that Tesla stands to dominate the $7 trillion autonomous vehicle industry because they already have 891,000 test cars out there gathering data and constantly improving their self-driving algorithms. It’s something we talked about in our piece on The Autonomous Vehicle Companies in the Self-Driving Race.
What do Autonomous Vehicles Need to Work?
Given the high complexity of the task at hand, startups and corporates working on driverless cars typically focus on one or several areas. First, autonomous cars need uniquely tailored perception systems like LiDAR to understand what’s happening around them. High-definition maps, that are precise to a centimeter, are required to navigate any environment safely. The vehicle’s artificial intelligence algorithms need to react correctly to any situation that may arise. In order to train these AI algorithms, we need data, which means developers have to drive millions of miles collecting data, or it can be created through simulations, or you can have your customers gather it which is what Tesla is said to be doing.
Startups like Zendrive and Nauto kill three birds with one stone. Their systems (a mobile app for the former, a combination of hardware and software for the latter) monitor drivers to alert them in the case of a distraction to ensure safe driving. In the meantime, they collect huge amounts of delicious big data for autonomous driving algorithms to learn from. As an added bonus, these systems provide the opportunity for insurance companies to reward safe drivers and penalize maniacs.
Other startups are working on Vehicle-to–Vehicle (V2V) communications. These technologies not only improve safety but driver assistance and traffic management as well. They can also aid law enforcement and emergency services – who won’t be needed as much when we finally move to full autonomy. Then, you have to construct the autonomous vehicles themselves. Tesla might be all the rage in Western media right now, but Chinese manufacturers are doing everything they can to compete. Some manufacturers focus on “mobility solutions” as opposed to selling vehicles, establishing the basic building blocks of futuristic driverless taxi companies.
One company providing pick-and-shovel exposure to autonomous vehicles is Velodyne, a developer of LiDAR solutions. The company plans to begin trading on the NYSE in Q3 2020 using a special purpose acquisition company (SPAC) instead of an IPO. If the transaction is successful, shares of Velodyne will trade under the ticker symbol VLDR. (Note that Tesla’s Elon Musk has called LiDAR for autonomous vehicles a “fool’s errand.) On the heels of Velodyne’s proposed IPO, a second LiDAR company announced their intentions to go public via SPAC – Luminar. More followed, something we covered in a piece titled Four LiDAR Stocks That Debuted in 2020.
Being a truck driver is the most common job in America, and there are about 3.5 million drivers of which 1.7 million drive the heavy trucks and tractor-trailers that blanket the country’s interstate highways. Hence, the industry created its own little startup ecosystem with companies developing applications for fuel efficiency, fleet management, and kits that can upgrade any truck to a self-driving vehicle. Other driverless trucking startups focus on the algorithms, computer vision solutions, or building the trucks themselves. Large conglomerates like Daimler and Walmart are also investing heavily in the field. While they aren’t pure-play investments on the theme, their contributions to the development of driverless trucking are significant.
Autonomous Vehicles That Aren’t Cars
Driverless cars might get all the press, but many other types of autonomous vehicles are being developed as well. Autonomous boats promise to navigate more economically and efficiently than humans do now. Startups like Sea Machines and even large corporations like IBM are working on autonomous shipping. A company called Built Robotics is working on autonomous heavy construction equipment, and they currently offer conversion kits for excavators, bulldozers, and skid steers. Autonomous planes are also in the making, but with a few roadblocks to navigate including regulation, certification, and air traffic control. Autonomous robots, tractors, trains, and of course, the Hyperloop are the icing on the cake of autonomous technologies.
Investing in Industrial Robotics
It’s tough to find a consensus on the size of the industrial robotics market because most analysts don’t agree on the definition of “industrial” use cases. Some include only manufacturing, while others also include logistics and warehousing. For the purposes of this report, we’re defining “industrial robotics” in the broadest sense of the word, incorporating factory automation, warehouse automation, retail automation, and anything else involving robots at an industrial scale. However you define it, industrial robotics is currently the largest application area for robots by far.
McKinsey did a survey of 85 Original Equipment Manufacturers (OEMs) and robot users globally in 2018 to understand the drivers of growth for the industrial robotics segment. Around 88% of respondents were driven to decrease production costs and increase flexibility in production. When asked about the roadblocks that hinder robotics growth, cost was the leading concern. According to ARK Invest, a leading global fund manager investing in disruptive technologies, industrial robot prices are declining and will continue to do so, which will result in industrial robot sales quadrupling during the next five years as more companies move to adopt them. Robots are also becoming more flexible as complexity moves from hardware to software.
Robots for Factory Automation
While there are many startups working on robotics for factory automation, there also happen to be many listed companies doing the same which is great for retail investors who want exposure to this theme. Some of these robots are modular and can be customized for a large number of activities such as those manufactured by Danish company Universal Robots which was acquired by Teradyne (TER) in 2015. Since then, Teradyne has been slowly pivoting from being a developer and supplier of automatic test equipment to become an industrial robotics stock. As we noted in our update on Teradyne in early 2020, the stock is far from pure-play at the moment. Unfortunately, that trend isn’t getting any better while the stock price soars to the moon. After holding for a few years, here’s Why We’re Trimming Our Gains in Teradyne Stock.
Just because you have lots of funding and lots of cool robots doesn’t mean people will pick up what you’re putting down. One example is Rethink Robotics, a high-flying robotics startup that was shut down in 2018 because “the market wasn’t ready for their innovations yet.” High-growth robotics startup Bright Machines might disagree with that assessment as they have removed the complexity from hardware by improving the software.
Looking around the globe, China is becoming a large consumer of robotics. When we looked at the available Chinese industrial robot stocks in 2018, Chinese robot density compared to employees in the manufacturing industry was below the global average. Today, China has surpassed the global average and is catching up to its main rivals. The U.S. also has a handful of well-established factory automation stocks for investors to choose from, but the definitive leader in industrial robotics is Japan with names like Fanuc (6954:JP) and Yaskawa (6506:JP) seen as leaders in industrial robotics.
Robots for Warehouse Automation
Working in a warehouse is not the most fulfilling of jobs. The work is repetitive and physically challenging, two qualities that robots happen to manage better than humans. Autonomous robots in warehouses and broader retail automation solutions are here to stay, freeing up humans “to do more value-added activities.”
Warehouse robots range from plug-and-play systems and forklifts working alongside humans to infrastructure systems that can fully automate warehouses – what they’re calling “lights out operations.” Giant retailers like Walmart (WMT) are embracing the concept with a whole robotic army at their disposal. Operating with tight margins means you need to capitalize on every single efficiency to remain competitive. WMT is a so-called “dividend champion” that’s been paying and increasing its dividends for 46 years in a row. Adopting technologies like artificial intelligence and robotics today will ensure the company will be able to retain this prestigious status in the years to come.
Warehouse robots have come a long way. Gone are the days when implementing warehouse automation meant a full re-design of the warehouse layout to make way for the pre-set movement patterns and paths of robots. Today’s warehouse robots are capable of full autonomy either alone or side-by-side with humans, thanks to AI algorithms. This is a good segue into a pick-and-shovel investment opportunity for both robotics and artificial intelligence: machine vision and computer vision.
The most advanced warehouse robotics platform in the world is built by Ocado Group, a company that also happens to be publicly traded.
Companies Developing Machine Vision and Industrial Cameras
In order to perform the same tasks as humans, broader artificial intelligence platforms need to have eyes, a mouth, or a body, depending on the application. The eyes are provided by machine vision systems, the mouth by natural language processing, and the body by robotics. Computer vision – also referred to as machine vision – allows artificial intelligence algorithms to process, understand, and utilize visual data just as humans do, with the help of high-performance cameras and image processing software.
Almost every type of robot needs some visual input. Whether it performs simple picking and sorting tasks, does autonomous navigation, or works collaboratively with humans, visual guidance is necessary for safe and efficient operation. Computer vision is at the cross-section of multiple disruptive investment themes including AI, industrial automation, and autonomous vehicles, so we created a guide titled “Investing in Computer Vision Companies and Stocks” to explore this investment thesis in detail.
Robots Replacing Humans Doing the Worst Jobs
Warehousing is not the only job that’s a pain in the butt to do. Industrial inspection tasks, maintenance, and high-rise window cleaning are all examples of relatively dangerous and time-consuming jobs. As in the case of warehousing, robots are now better equipped to deal with these. A startup called Aerones developed drones and robots that clean wind turbines at one-fifth of the cost of human industrial climbers. This kind of regular maintenance not only increases wind farms’ energy efficiency but their lifetime as well. New Zealand startup Invert Robotics specializes in industrial inspection as a service – a task it can do much faster and with better quality than humans. To reinforce our previous point, both these startups employ machine vision to get the job done. Industrial robots may not always look as we would expect them to, something we covered in our piece on “Why The Future of Robotics May be Four-Legged.”
Robots in Healthcare
In 2018, the global healthcare market reached a value of $8.5 trillion, with $3.65 trillion spent in the United States alone. The global healthcare system is so big and complex that achieving really small efficiency gains in a given area is still a big deal. This is why healthcare keeps popping up as the beneficiary of many of our disruptive technology themes. Artificial intelligence, IoT, AR, VR, and 3D printing are all technologies that promise to make different areas of medicine safer, more democratic, and more efficient.
Robotics is no exception either. Robots are helping in elderly care and the daily operations of smart hospitals. Robotics technology is being used to create bionic limbs and help dental surgeons perform implants. But the area where healthcare robots really shine is robotic surgery.
Robotic Surgery Stocks and Companies
We’ve counted at least eight different types of surgeries that are now being performed or partially performed by robots (also called assisted surgeries). All kinds of companies, both public and private, are building robotic surgical devices that can even help perform heart surgeries. The field has seen plenty of consolidation as larger medical device companies like Stryker and Medtronic invest in this space organically and by acquiring other surgical robot companies. Even our favorite dividend growth stock, Johnson & Johnson, is eyeballing robotic surgery as a growth area. (Stryker, Medtronic, and JNJ all happen to be dividend growth stocks we’re holding as part of our 30-stock portfolio of dividend growth stocks.)
From privately held robot surgery companies like CMR Surgical to publicly-traded ones like Restoration Robotics and their hair transplant robots, we’ve looked at every name out there – even the ones that are just starting to dabble – and put together a list of 6 Robotic Surgery Stocks for Retail Investors, all of which are pure-plays, but not all worthy investments.
Robots for Consumers
Perhaps the first large-scale implementation of consumer robotics was iRobot’s robotic vacuums of which more than 20 million have been sold. Plenty of other use cases exist for robots around the home, or even outside the house in the case of robotic lawnmowers. There are robots for the kids to play with and educational robots to learn from. Robots help grandma walk and keep her company. (Retail investors should check our piece on exoskeleton stocks.)
When dad goes to the office, he’ll find robots there as well. (Some of you are probably irked now because you think we’re being sexist here by assuming dad goes to the office. Before you go shooting off that scathing email to our editor, this is actually a household with two dads, so the joke’s on you.) In households where there’s a mom and a dad, mom doesn’t have to vacuum anymore because robots are doing the vacuuming instead. (Now you can send that email.)
Eventually, all these types of robots will be made in China, if they aren’t already. The problem is, lots of things get lost in translation. One Chinese robot company we looked at twice was CloudMinds, and we still couldn’t really figure out what they do. CloudMinds was supposed to have an IPO but it doesn’t seem to have happened.
For retail investors, iRobot (IRBT) is a publicly traded stock and one way to get some pure-play exposure to consumer robotics. It’s a company you should find in all the robotics ETFs cropping up out there.
In addition to the many robot stocks we’ve found during our research, there are also a number of thematic ETFs out there that offer varying degrees of exposure to robotics. The problem is that most of these robotics ETFs can’t agree on which companies to include. Just take a look at the overlaps between three popular robotics ETFs – BOTZ, ROBT, and ROBO:
Turns out that there are only 18 stocks found in all three ETFs which means investors will get three completely different market exposures from these three ETFs though they all claim to be offering exposure to the same themes. We figured out which robotics ETF is the best for investors so you don’t have to.
Other ETFs we’ve looked at include:
- A drone economy ETF that didn’t last long because there aren’t really any pure-play drone stocks as we mentioned earlier.
- Several ETFs for investing in autonomous and electric vehicles
People often wonder whether robots will ever become intelligent enough to overthrow the humans. That’s one concern, which is why Asimov came up with the “rules of the robot.”
- A robot may not injure a human being or, through inaction, allow a human being to come to harm.
- A robot must obey orders given it by human beings except where such orders would conflict with the First Law.
- A robot must protect its own existence as long as such protection does not conflict with the First or Second Law.
For robotics investors, there’s a fourth rule. Don’t ever invest in penny stocks (also called over-the-counter or OTC stocks). Ever.
There are other ethical concerns around investing in robots as well. Given the large number of jobs that robots will displace, it makes us wonder how the ESG types plan to address robotics as an investment thesis. Whatever happens, we can be sure that robots will be increasingly used by companies to do things quicker, better, and cheaper.
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