BOTZ: The Robotics/Artificial Intelligence ETF Is Not A Bargain Buy Even After Recent Crash – Seeking Alpha

Original article can be found here (source): artificial intelligence

With the devastating coronavirus outbreak showing no sign of relenting, global stock markets tumbled into bear market territory before a vicious double-digit relief bounce to close the week. For the Global X Robotics & Artificial Intelligence ETF (BOTZ), its bear market actually started in 2018 when BOTZ stumbled back to earth from its 80+% meteoric rise in the preceding year:

Source: WingCapital Investments

Prior to the market turmoil, BOTZ had struggled to retrace towards its all-time high, even as the broader technology sector ETF (XLK) and S&P 500 (SPY) continued to make fresh record highs. After the most recent meltdown, BOTZ is now up only around 17% from its inception price, which is a far cry from the nearly 80% gain in XLK.

Source: WingCapital Investments

Uninspiring Earnings Picture Justifies BOTZ’s Continued Underperformance

Fundamentally, while BOTZ may seem like an ideal investment considering the fact that robotics and artificial intelligence increasingly have become an ubiquitous part of our daily lives, the underlying holdings’ earnings picture suggests otherwise. Specifically, we observe that the growth in earnings before tax (EBT) of the top 15 holdings has not only tailed off but actually turned negative in 2019:

Symbol Name Country % Weight 1-Year Price Return 2014 EBT Excl. Unusual Items 2016 EBT Excl. Unusual Items 2018 EBT Excl. Unusual Items 2019 EBT Excl. Unusual Items 5-year CAGR 3-year CAGR 1-year CAGR
NVDA NVIDIA Corp U.S. 11.34% 34.00% 755.00 1929.00 3884.00 2970.00 31.51% 15.47% -23.53%
6861 Keyence Corp Japan 7.10% -6.80% 136741 203601 298859 319860 18.53% 16.25% 7.03%
ISRG Intuitive Surgical Inc U.S. 6.74% -15.70% 639.90 997.40 1326.50 1497.00 18.53% 14.49% 12.85%
ABBN ABB Ltd Switzerland 6.56% -17.70% 3428.00 2070.00 2186.00 2510.00 -6.04% 6.64% 14.82%
6503 Mitsubishi Electric Corp Japan 6.31% -8.00% 252781 326958 384459 315958 4.56% -1.13% -17.82%
6954 Fanuc Corp Japan 5.63% -14.90% 174673 230218 250093 184518 1.10% -7.11% -26.22%
DT Dynatrace Inc U.S. 5.13% -11.60% #N/A #N/A -46.79 -137.95 N/A N/A N/A
6273 SMC Corp Japan 4.77% 5.00% 120548 129186 197721 198481 10.49% 15.39% 0.38%
6383 Daifuku Co Ltd Japan 4.54% 0.60% 13190 21994 41104 55840 33.46% 36.42% 35.85%
6645 OMRON Corp Japan 4.49% -10.00% 66526 66272 84147 73108 1.90% 3.33% -13.12%
TECN Tecan Group Ltd Switzerland 4.25% 3.80% 49.92 66.19 82.51 82.51 10.57% 7.62% 0.00%
6506 YASKAWA Electric Corp Japan 4.08% -13.10% 27083 35833 55300 50843 13.42% 12.37% -8.06%
RSW Renishaw PLC U.K 3.69% -28.30% 70.11 85.14 151.95 108.86 9.20% 8.54% -28.36%
JBT John Bean Technologies Corp U.S. 3.16% -24.00% 59.20 106.30 176.00 181.10 25.06% 19.43% 2.90%
BRKS Brooks Automation Inc U.S. 2.92% -11.00% 9.43 -5.60 30.08 32.95 28.43% N/A 9.54%
80.71% -4.29% Weighted Average 13.82% 10.09% -3.57%

* Earnings Before Tax (EBT) in local currency (millions)

As shown above, most of the top 15 holdings had enjoyed solid earnings growth between 2015-2018 but came to a halt last year. As a result, the price-to-earnings ratio remains at unattractive levels even after the most recent stock market crash. Below chart shows the P/E ratios of the top 5 names as well as the weighted average P/E of the top 15 holdings:

Source: TIKR.com

To put BOTZ’s weighted average P/E north of 30 in context, below we compare BOTZ’s valuation metrics vs. key ETFs. As shown, BOTZ is substantially more expensive than the broader technology sector, semiconductors as well as the flagship indices of S&P 500 and Nasdaq 100.

ETF Comparison BOTZ XLK SMH SPY QQQ
Sector/Name Robotics & A.I Technology Semiconductors S&P 500 Nasdaq 100
Trailing PE Ratio 31.73 25.05 24.09 19.83 25.3
Forward PE Ratio 24.84 21.22 18.31 17.45 22.12
Weighted Median ROE 16.51%* 40.24% 27.08% 27.45% 31.15%

* Based on top 15 holdings. As of 3/13/2020.

Furthermore, BOTZ’s return on equity is also rather mediocre comparing to its peers at around 16%. Indeed, BOTZ’s ROE has been dragged down by a significant drop-off in NVDA’s ROE last year as well as the subpar profitability of its Japanese holdings (~10% ROE) :

Source: TIKR.com

Heavy Exposure to Japan Will Continue Dragging Down BOTZ

Another reason for BOTZ’s dismal performance the past few years is due to its concentration in Japanese stocks. In fact, the 42% exposure to Japan is the BOTZ’s top allocation by country, with the U.S. being second at 36%.

Source: ETF.com

Not only has the Japanese stock market continued to be plagued by a fragile domestic economy and uncertainties surrounding Tokyo Olympics, persistent foreign outflows have piled on additional downward pressure on Japanese stocks as well.

Source: Investing.com

Hence, we expect BOTZ’s substantial Japanese exposure to remain stagnant against the backdrop of gloomy fundamentals and sentiment in the Japan economy and stock market.

To sum up, while long-term growth prospect on the technology sector remains bright in our opinion, we anticipate BOTZ to remain stuck within its long-term consolidation due to unfavorable earnings growth and geographical allocation. On that note, we reckon XLK and/or SMH would be more compelling alternatives to buy for the long haul.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.