Computers are getting smarter by the day. With each year, robots and automation become increasingly finer tuned, nuanced... and affordable.
As the pressure for profits squeezes every industry, automation will inevitably usher in a new age of commerce. McDonald’s is already implementing automated services to bring its fast food to you faster than ever before. Last year, Amazon began delivering small packages to its rural customers via automated drones in 30 minutes or less. And every major automobile maker has long relied on robots to help build its vehicles.
It’s only a matter of time before robotics and automation will forever change the way our global economy functions. The real question isn’t when this will occur. The real question is how can you cash in on it? Let’s explore.
And a reminder: This is not official investment advice (for that, hire a licensed financial advisor), so invest at your own risk.
What Is Automation and How Big Is This Industry?
Automation refers to robot-operated services that do not require real-time inputs from human operators. It’s in the name: automation is whenever a machine automatically functions on its own. Automation intersects heavily with artificial intelligence, or AI, though the two exist in distinct, separate fields. (For more on investing in AI, check out our guide on cloud computing investments.)
Until recently, automation largely resided in factory manufacturing, such as for automobiles, microchips, and mobile devices. However, we’ll soon see automation everywhere, from delivering goods on our doorsteps to talking us into buying the newest, coolest gadgets.
First, let’s distinguish the types of automation and their markets:
Industrial automation refers to robotics used in factories and other modes of large-scale production.
Professional services automation refers to robotics used for non-industrial services, such as deliveries or processing orders.
Automation software refers to applications and programs that either operate automated robots or streamline automated processes.
Some companies handle all three kinds of automation, while others focus on just one aspect. Doing a little homework on the companies you’re considering for investment will go a long way to scoring significant capital gains.
In 2018, one report valued the global industrial automation market at over $157 billion at an 8.4% compound annual growth rate (CAGR), with an anticipated worth of $300 billion by 2026. A separate report estimated that factory automation, worldwide, was worth about $190 billion at an 8.8% CAGR, potentially reaching $368 billion by 2025.
There’s more possible growth in the professional services automation market. In 2016, one firm estimated the pro services automation market to be worth just $635 million globally, and crossing the $1.2 billion mark by next year at a CAGR of 11.7%.
Regardless of the source, we could see the combined global automated robotics markets valued at half a trillion dollars sometime within the next decade. So, is there money to be made in this sector? Yes, there definitely is.
Why Investors Should Buy Robotics and Automation Stocks
So, here’s the deal: Automation is about to eliminate a lot of blue-collar job positions. We’re talking millions of jobs vanishing over the next decade, in industries as varied as trucking and food service. Hopefully, millions of new jobs will also be created thanks to automation. But why is this robotics revolution on the horizon, though?
The bulk of any business’s overhead costs is human labor. Humans, after all, are a demanding bunch. We want decent, livable wages. We want healthcare. We want matching 401(k) plans and paid time off. If we get hurt on the job, we want money for that, too. We want bonuses, profit sharing, free office coffee, and pizza parties. In the end, all that cuts deep into a business’s quarterly revenue.
Automation offers an enticing solution to human labor costs. Robots don’t get hurt on the job. Robots don’t need to take vacations. Robots can’t file lawsuits. And most of all, robots don’t require wages. The cost of purchasing and maintaining an automated robot is leagues lower than hiring a human laborer — for better or worse.
Machine learning, deep learning, and AI are birthing legions of automatons that can do what many human laborers currently do, at a fraction of the costs and managerial headaches. Furthermore, robots can be monitored, tracked, and upgraded in ways that humans cannot. The COVID-19 pandemic also triggered a spike in demand for automation, a trend that likely won’t go away even after the #coronapocalypse ends.
If a company’s got the capital, you can bet it will replace its human workforce with automation anywhere it can...
According to a 2019 Brookings report, there are three industries where 70-100% of the workforce can be replaced by automation. Those three are production, food services, and transportation.
Image via Brookings
That same report found that several other job categories are susceptible to automation, as well. Some may surprise you. These include positions in maintenance, administration, and sales — sectors that once required humans to do all the work. Even the legal, arts, and entertainment sectors could see 15-25% of their labor forces replaced by machines over the next several years.
Basically, the automation market is growing and will continue to grow. If you make wise investments now, you could see ample returns as the demand for automation increases.
The Top Automation and Robotics Stocks to Watch Right Now
OK, so you’re ready to drop some cash into the most promising robotics and automation stocks. Where should you consider investing your hard-earned money? And when should you invest in these stocks?
There are some obvious picks here, though you may not think of them as automation investments. Tesla ($TSLA), the electric vehicle maker, plans to roll out an automated ride-hailing service in the coming years. You may already own stock in Tesla, in which case, you’ve already bought into the burgeoning automated robotics market. (You savvy investor, you!)
Another blue-chip company with skin in the automation game: Alphabet ($GOOGL), the parent company of Google. Alphabet also owns Waymo, which will compete against Tesla’s automated ride hailing service with its own fleet of electric vehicles.
But like we said, those are the obvious bets. You’re looking for something more nuanced, right?
If you’ve been following the news, then you’ve probably heard about the robotic police dog that’s being tested by the NYPD. That K9 robocop is the brainchild of Boston Dynamics, a robotics company recently bought by S. Korean automaker Hyundai ($HYMTF) for a very cool $1 billion.
Hyundai’s stock has performed decently over the last year (its price has more than doubled since March 16, 2020), and the Boston Dynamics acquisition may prove lucrative in the long run. Boston Dynamics’s robo-pooches don’t just sniff out misdemeanors; they’re also used to inspect warehouses, detect explosives, and may even secure a spot in the US military. In fact, Boston Dynamics has managed robotics development for the Pentagon’s high-tech research arm, DARPA, for well over a decade.
But hey! If you’re not keen on investing in defense contractors that bolster the military-industrial complex and its complementary police state, we don’t blame you. Fortunately, there are plenty of other potentially profitable companies that could use your investments.
Now for the not-so-obvious considerations.
Some of the best, if not the two best performers lately, are Ambarella ($AMBA) and Cognex ($CGNX). Automated robots gotta see, right? Both companies specialize in machine vision, though in different industrial sectors. Ambarella excels in computer vision, video compression, and image processing, whereas Cognex focuses on industrial robotics and detecting malfunctions among assembly lines.
Ambarella’s stock soared over 170% during the last year, while Cognex’s price skyrocketed over 320% in the past year.
On that note, automated robots gotta hear, too. Nuance Communications, Ltd. ($NUAN), based in Massachusetts, is perfecting voice and speech recognition for machines. Over the past five years, its stock price jumped 306% — including a nice 180% leap in the last year alone. Nuance’s speech processing tech, along with its own in-house AI, recently gained the attention of Walgreens, Bank Australia, and Augusta Health, all of whom are Nuance’s clients.
Moving into mass production, Fanuc ($FANUY), Kuka ($KUKAY), Yaskawa ($YASKY), ABB, Ltd. ($ABB), iRobot ($IRBT) (a first-mover), Siemens ($SIEGY), Rockwell ($ROK), Kion ($KIGRY), and 3M ($MMM) may bring some healthy dividends in the coming years. These companies produce automated robots for construction and factory manufacturing, which will likely rake in the bucks once the pandemic ends. However, these big manufacturing stocks can also be volatile, since their profits are tied to the semiconductor and electric vehicle markets (neither of which are doing hot right now).
Finally, since automated robots require a ton of energy, consider looking into an outfit that specializes in energy solutions. Schneider Electric ($SBGSY), based in France, uses automation to help homeowners, businesses, data centers, and, yes — robotics companies — optimize their energy use for both environmental sustainability and maximizing profits.
Schneider primarily operates in the EU, but seeing as the EU has committed itself to greener economies, that’s good news for smart investors.
Automation and Robotics Companies to Avoid Investing In
Here’s the thing with automation and robotics: It’s an incredibly expensive field for research and development. Only the best of the best can turn these ventures into profitable enterprises, and even the most promising projects fall through due to poor planning, unexpected costs, and force majeure.
Some companies may simply not turn huge profits in the foreseeable future.
For instance, you’ve likely heard about the da Vinci surgical robot, designed and sold by Intuitive Surgical ($ISRG). Now don’t get it twisted, Intuitive Surgical is one of the wildest success stories in the robotics world, as its stock lept from $213 at the end of 2016 to a whopping $824 at the start of 2021. So, why would we suggest avoiding it for now?
First, Intuitive Surgical’s stock price has dipped to $715 per share as of this writing. It might’ve been overhyped, or it might just be leveling off.
Second, the da Vinci isn’t entirely automated. Calibrating it is automated, but it requires a flesh-and-blood surgeon to teleoperate it.
Third, its market is likely fulfilled for a while, meaning the hospitals that wanted it already have it, and the hospitals that don’t have it probably can’t afford it or don’t need it.
Fourth, the da Vinci hasn’t been popular outside of the US. Out of the 5,500 units installed globally, roughly half were purchased in other countries. Why? Possibly because most of the industrialized world provides socialized preventative healthcare to its citizens, so doctors overseas often discover maladies long before those conditions require surgery.
The pandemic has also put the kibosh on a lot of scheduled surgeries, necessary and elective. If the US expands the Affordable Care Act or — gasp! — finally provides Medicaid-for-All, we may see the demand for surgeries continue to plunge in the Land of the Free, too.
Finally, although Intuitive Surgical currently has no real competition, that may soon change. Its biggest potential rival, the powerhouse medical tech firm Medtronic ($MDT), is currently making moves to convert da Vinci’s clients away from Intuitive Surgical.
Basically, if you didn’t already own stock in Intuitive Surgical, you probably missed that window of opportunity. That’s not to say Intuitive won’t innovate or expand its markets (especially if they can truly automate the da Vinci), but for right now, you probably won’t see major gains like investors did over the past four years.
When it comes to automation and robotics companies to avoid, there are a few things to look for.
- Is the company solving a widespread or expensive problem?
- Does the company have the capital and resources to properly research and solve the problem?
- Does the company face stiff competition, or will it be a first-mover in its niche?
- Does the company have true potential to generate revenue, or is it depending solely on buzzwords and media hype?
- Are other companies interested in the target company’s services or products?
Examples of Cautionary Tales in Automation and Robotics
Honestly, there are way too many cautionary tales in this field to list here. But we should highlight some.
One ubiquitous automaton type that often fails are robotic companions or robot toys. Keeker, Anki, Reach Robotics, and Hease were all firms that designed robots to serve as our buddies, playmates, servants, or consumer guides. They all failed because: (1) AI hasn’t yet reached the point where it can interact with and engage humans on a truly emotional level, and (2) social media, customer reviews, and text messaging are still kings when it comes to digital communication.
Other failures include Blue Workforce and Aria Insights, which promised workhorse robots for the food service industries and law enforcement, respectively. Both failed to raise capital and secure contracts to keep them operating, probably because their products offered more novelty than unique functionality.
We should note, however, that all of the cautionary tales mentioned above were bought up by larger firms. So, although they didn’t actually deliver on their initial promises, their research was valuable for bigger automation companies.
One last thing: All of those big mass production automation and robotics companies we mentioned a couple of sections ago? Watch those stocks very, very carefully. As previously stated, they can be volatile, and their success is heavily dependent on other often-volatile industries, such as electric vehicles, metals mining, and semiconductor manufacturing.
I Have $666, How Should I Invest It in Automation and Robotics?
If you’re ready to drop some cash into automation, here’s how you could start. Again, none of this is official investment advice (for that, hire a licensed financial advisor). Every dollar you invest could ultimately short circuit, so trade at your own risk.
Wise investments should typically be spread across a relatively diverse portfolio. That’s not really possible in this hypothetical, since you’re investing the entire $666 into one sector (automated robots). That said, you should still divvy it up to minimize your risk and potential losses.
Split that $666 into four parts. Put $200 into robotics or AI ETFs, such as Robo Global Robotics and Automation ETF ($ROBO), ARK Autonomous Technology & Robotics ETF ($ARKQ), iShares Robotics and Artificial Intelligence ETF ($IRBO), and Innovator Loup Frontier Tech ETF ($LOUP).
ETFs are essentially diversified portfolio investments that trade as a single stock. Low risk, but usually slower and smaller gains in the long run compared to individual company stocks. All of the suggested ETF stocks above grew anywhere from 50% to 150% over the last three years.
Watch your ETF investments to see which ones do well, note which companies they’ve invested in, then later consider moving more money into those individual stocks.
With the next $200, drop that into the mass production automation stocks, like the aforementioned ABB ($ABB) or Rockwell ($ROK).
With the third chunk of $200, invest in specialist firms that any and all automation companies may rely on, such as machine vision (Cognex, Ambarella), speech processing (Nuance), and/or energy optimization (Schneider Electric).
The remaining $66 can be invested in any other stock(s) related to automation that you feel really good about, maybe a moonshot player in an industry that you believe in. See if your bet pans out after a year or so.
You could also devote part (or all) of that $66 to ancillary businesses that support the automated robotics industries. For example, heavy metal mining and distribution firms such as Glencore ($GLNCY), which produces cobalt, or Ablemarle ($ALB), which produces lithium, are sound bets. Semiconductor companies like Texas Instruments ($TXN) or Samsung (KRX: 005930) may be wise choices, too. Even conventional automakers that are shifting to electric vehicles, like Toyota ($TM), GM ($GM), or BMW ($BMWYY) could pay out in the long run.
In the end, never put all your eggs in one basket, as the saying goes. Do your homework on any company you’re considering investing in, spread out that financial love across multiple stocks, and keep up-to-date on all the latest news and gossip concerning your investments (and, just as important, their competition).
Good luck, and make that bank!