Investing in Industry 4.0 Part 2

Published on 06/23/20 | Saurav Sen | 1,016 Words

The BuyGist:

  • This is a continuation of Investing in Industry 4.0.
  • The focus of this worldview article is to prioritize our investment analysis.

The Real World

The relationship between the real world and the digital one is one of the most interesting aspects of Industry 4.0 We didn’t make this point clear in Investing in Industry 4.0 Part 1. But of course, in producing real, physical goods, real-world data will need be collected, digitized, transmitted, analyzed and acted upon. In industry parlance, this real-world data  is known as Analog data.

Analog data needs to be digitized before it’s sent anywhere to analyze. In our dream SDM (software-defined manufacturing) scenario painted in Investing in Industry 4.0 Part 1, robots and cobots would work alongside humans to make sure production runs smoothly once engineers hit “print”. This requires robots and cobots to have human-like senses. This is no easy feat.

To be clear, we’re nowhere near this dream SDM scenario. But the various components – the myriad of technologies – to get to our “grail” scenario are there today. They just need to come together. It may take years, but we wager that it will happen. Why? Because there’s a business case for it. And if there’s a business case, there’s an investment case.

The 5 Senses

Imagine machines being able to see, hear, touch, smell and taste. At some level, this is already possible. But it all seems a little underdeveloped and disparate now because different machines can do different things in varying degrees. But there is still a chasm when it comes to:

  1. Digitizing the data
  2. Analyzing the data.

Recall that AI is a recent phenomenon. We’re still in the early phases. Machine Learning is just about going mainstream. Alexa is the best example – she can hear us, digitize that information and analyze it to act upon it. But she’s an exception.

Machines are yet to see pictures with reliable accuracy. They’re yet to smell with accuracy. They’re yet to touch something and identify it with accuracy. We would wager that over time these deficiencies will be remedied. And as that happens, we’ll get closer to our grail SDM scenario.

In short, we should be looking at companies that help machines – mostly robots – to see, hear, touch, smell or taste.

Our Industry 4.0 Universe

We’ve taken our universe in Part 1 and added a few companies, mostly in the Analog Semiconductors space. These are companies that make chips which can collect and digitize real-world analog data such as motion, temperature, sound etc. The act in concert with sensors and other more, complicated chips that analyze the data to gain insights. Here’s the list so far:

If it looks too crowded, we apologize. Below we’ve attempted to break down the universe in more manageable categories.

Sub-Universe 1: Sensors

  1. Honeywell
  2. Sensata

Sub-Universe 2: Analog Semiconductors

  1. Texas Instruments
  2. Analog Devices
  3. Microchip Tech
  4. NXP

Sub-Universe 3: Factory Bots

  1. ABB
  2. Teradyne
  3. Rockwell Automation
  4. Siemens AG

Sub-Universe 4: Military Bots

  1. General Dynamics
  2. Lockheed Martin

Sub-Universe 5: Users of Robots

  1. Amazon
  2. Ocado

Sub-Universe 6: Med Bots

  1. Stryker
  2. Medtronic
  3. Intuitive Surgical

Sub-Universe 7: Japanese Bots

  1. Fanuc
  2. Yaskawa
  3. Mitsubishi Electric Corp.

The last one – Japanese Bots – are missing from the master list. That’s because we couldn’t get reliable information yet. But we’re on it.

So, what do we do now?

First, we take another look at companies we’ve already analyzed:

  1. FLIR
  2. ABB
  3. Lumentum
  4. Sensata
  5. NXP

Among these, we’ve already held ABB, Lumetum, Sensata and NXP before. Our hit rate there is 3 out of 4. We’ve made good returns on everything but ABB. And we sold out of ABB during the epic market crash of March 2020, to make room for other holdings.

FLIR is the obvious candidate for a new investment. It’s trading much below our valuation of $52 per share. We did a deep dive on them recently in April. However, we will revisit our thesis just to check whether our valuation needs updating. Lumentum is the other candidate. We’ve crystallized fantastic returns by holding them through thick and thin in the past.  But in light of Industry 4.0, we will revisit our thesis to take another look at its Chinese exposure.

Then we zero in on companies that are trading at or below their rough valuation. Some candidates stand out but right up to Rockwell, they're fair game to analyze. The numbers below are simply rough estimates:

Third, we refrain from analyzing Med Bots until we have a full-fledged worldview on the Medical Equipment sector. Since March, this sector has been on our to-do list. We haven’t got to it because of other commitments. But it’s time we give it a go – this will probably happen in July.

OK – for now we look at FLIR before moving on to Lumentum, Sensata and NXP. Only one of these will make it into the portfolio – the one that’s best positioned to gain from investments in Industry 4.0.

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