AI & Robotics - Year's Favourites 2023
16 January 2023
The three companies we selected for 2023 in the AI & Robotics portfolio are Ambarella, AutoStore, and Baidu.
How we chose our Year's Favourites
Last year, we picked our Year’s Favourites based on the fundamental conviction that the infrastructure rollout for Artificial Intelligence (AI) was only beginning. This translated into two semiconductor picks, AMD for the data center side and Ambarella for the edge side. In addition, for the latter, fresh opportunities were brewing in autonomous mobility, with autonomous driving services and collaborative robots displaying solid prospects. Our third pick, Snowflake , closed the circle by including the software side of the infrastructure, as large quantities of data are fundamental to training AI models, and managing this data requires specific heavy-duty solutions.
What did not work
Our picks faced several unforeseen headwinds. The most important one was the general penalty applied to technology stocks with substantial exposure to the consumer business. AMD and Ambarella, suffered even if their B2C exposure were lower than the B2B business; for AMD, the impact was compounded by Meta, which we expected to be a major demand driver, but which ultimately entered a period of turbulence; in addition, the chip maker was impacted by the meltdown of the cryptocurrency market, and more generally went down along the semiconductor segment. Ambarella was negatively impacted by unforeseen supply chain headwinds, and its end markets were generally not as dynamic as what was initially expected. Finally, Snowflake improved the efficiency of its backend, resulting in a higher number of operations per $ spent for its customers; this acted as a headwind on growth in the short term but is most likely to help retain customers over the long term, as customers will increase their usage of Snowflake and tighten the knot locking them into the ecosystem; however, the subsegment top-line slowdown triggered a violent reaction from investors, as the stock was richly valued.
At first glance, it is hard to find any positive given the share price performances; however, behind the gloom, there were some silver linings at the operational level. First, AMD has been steadily gaining market share over Intel, cementing its momentum in the server segment until at least 2024; the company also successfully unfolded its product roadmap, notably concerning heterogeneous integration. Then, Ambarella announced major deals with automotive equipment makers Continental and Bosch for its latest generation of computer vision chips, which will open major opportunities for the company considering the importance of their market positions in the automotive market. Finally, Snowflake successfully executed its roadmap, and benefited from its neutral positioning in the context of the rise of multi-cloud.
What do we expect for the theme
We expect 2023 to be a turning point for applications. Advanced AI applications have started to be integrated at a larger scale in economies thanks to their rapid progress and differentiating potential. However, the expected recession and inflationary pressures may weigh on CAPEX spending, temporarily dragging on infrastructure spending. We, therefore, choose to take out from our favorite list AMD and Snowflake , which lack major catalysts for 2023 despite their fundamentals remaining extremely strong, but retain Ambarella, which is closer to the application side. For 2023 we introduce AutoStore, as we expect warehouse automation to be an AI application that will also be a strong beneficiary of the tense economic context, and Baidu, as we expect a catch-up effect in AI-related applications compounded by strong dynamics in China with the end of the zero-covid policies.
Key Drivers behind our strong conviction
Ending the inventory transition
2022 had been impacted by violent turbulences at the inventory level. 2023 will see this pressure coming to an end: supply chain troubles are ending, with yields improving (e.g., at Samsung) and lead times shortening. Also, customers will have purged their excess inventory over 1H23 and will start to replenish them with new-generation products. On top of that, the Chinese sword of Damocles has almost disappeared. Chinese security camera players are being almost phased-out following U.S. sanctions, leaving Ambarella ready to capture the resulting demand at a time when the market is initiating a technological transition toward AI cameras.
Time to reap the fruits
The announcements of the Continental and Bosch partnerships are, in our view, a turning point. Being integrated as a reference supplier for critical driving security systems at such major automotive Original Equipment Manufacturers (OEMs) will open significant business opportunities and will most likely lead to several design wins in the next few quarters. This will generate substantial revenues and be positive for margins due to the high technological content of the CV3 chips (ASPs > $300). A virtuous cycle, reinforced by the possibility to cross-sell additional products at limited costs, is going to take place as the company’s CV technology platform is modular. The deals also act as a “seal of approval” and reinforce the company’s credibility for future deals with other OEMs, paving the way for potential future announcements in the same vein.
Autonomous mobility gaining traction
Autonomous transportation is rapidly gaining traction and will take a major step in 2023 with the rollout of fully autonomous robotaxi services and the increasing penetration of advanced assistance driving security systems. Although related revenues are still a few years away from representing the company’s bread and butter, we believe the revenue inflection will be a major catalyst for the stock, as the equity story is largely linked to the progress in the automotive market. On top of that, a huge potential exists in autonomous robotics, a market that remains too fragmented at present but is maturing fast under the combination of wage inflation, workers shortage, and increasing demands in logistics.
About the company
The machine vision champion
Ambarella has developed a vast portfolio of machine vision chips dedicated to edge AI. The company pivoted from basic video compression to action cameras and advanced machine vision applications encountered in autonomous mobility. Years of targeted R&D and acquisitions have given birth to a modular technological platform able to tackle the full spectrum of the machine vision market and provide the company with a substantial technological edge over the competition.
A gigantic potential to unfold in automotive
Machine vision is increasingly used in cars to monitor passengers and driving assistance systems. With increasing automation, sensors’ number and complexity are bound to grow, not only for cameras. Ambarella’s chips enable to centralize data processing for video cameras and, thanks to its acquisition of startup Oculii, for radars. Thanks to its holistic approach and lower costs, Ambarella is presenting an offer hard to refuse and starting to hunt on Lidar players’ territory.
Adapting beyond current markets
The company has historically demonstrated its ability to quickly adapt its product portfolio to the emergence of new markets. This flexibility is expected to help the company capture the best of opportunities beyond its current positioning, such as in robotics. The modular platform will indeed enable entering into new markets by deriving new products from existing technological building blocks, combining rapid development times with low design costs.
Automotive deals. Major design wins within the Continental and Bosch partnership, or new partnerships with other OEMs or tier-1s, would materialize years of R&D and commercial efforts.
Effective technology transition. The CV architecture is close to accounting for the majority of revenues (45% targeted in 2022e); crossing the 50% threshold will definitely act the technological transition and put future prospects under the spotlight.
Autonomous robotics announcements. Autonomous robotics remains early stage and fragmented; the company announcing working on a specific project would mean an inflection point has been reached.
Lagging end-demand. Ambarella’s chips will end-up in high-end cars at first, which command a high selling price; a major recession would necessarily impact this end-market.
Competition. The company’s main competitors (Nvidia, Qualcomm and Mobileye) have deeper pockets and may bridge the technological gap by enacting huge investments.
Supply-chain. The company is dependent on Samsung Electronics for manufacturing its chips, and is at the mercy of yield problems which could decrease the supply, or could be the victim of rising prices impacting its margins.
Key Drivers behind our strong conviction
Perfectly positioned for inflation and recession
With rampant inflation, it is only a matter of time before employees start demanding wage hikes, which will be particularly detrimental to businesses relying on a high number of low-wage personnel, such as in logistics. Automation will therefore be the most logical choice for businesses. On top of that, AutoStore launched in 2022 a consumption-based business model to complement its traditional CAPEX-based one. The new model, which will start to contribute in 2023, will enable a significant cut in the initial upfront costs (up to -40%), enabling easier deployment in cash-tight periods like recessions and allowing to address a broader customer basis, notably SMEs. It will also increase recurring revenues, add more stability to the company’s strong growth profile, and benefit margins over the long term.
Rising costs have impacted the company’s margins. Mitigation actions have already been taken but needed time to materialize due to the elongated lead times. Therefore, the impact on margins will fully happen in 2023, with a first inflection point potentially as soon as 4Q22. In addition, the new Thailand factory, which will enable additional capacity at a lower cost, will come online in 2H23 and provide an additional lift to margins. 2023 will add a margin expansion story to a strong growth profile.
The company’s revenues are today primarily generated in Europe (~70%), with ~20% in North America and ~10% in APAC, leaving the company exposed to European economic dynamics. However, with growth rates already superior in non-European regions, we expect this risk to decrease rapidly, especially as technological innovations (e.g., the ability to manage fresh and frozen food) will open new opportunities and accelerate market share gains. In addition, the company has launched a data analytics offering based on data telemetry generated by its robots, diversifying its business, optimizing its solutions’ efficiency for its customers, and increasing the cross-selling potential.
About the company
Robots’ hive in squirrel cages
AutoStore is a Norwegian warehouse automation player specializing in automated storage and retrieval solutions. Their end-to-end system is based on small mobile robots working on a squirrel cage-like aluminum grid, in which are stored bins containing goods, which the robots will pick and deliver to workstations at the periphery of the warehouse, closest to the shipping stations. Although somewhat more constraining than autonomous mobile robots due to the necessity of having a guiding infrastructure, such systems enable a tighter footprint as well as lower-cost robots, as those do not require advanced sensors to work alongside human workers.
Automation is not a choice, but a necessity
With a large proportion of warehouses relying on human workers (less than 20% of warehouses are automated), the market potential is huge for automation players. Automation is indeed rapidly becoming a necessity: warehouse jobs are indeed very demanding for workers, leading to a shortage of people aggravated by a tight labor market and an aging population. Deploying robots is therefore a no-brainer, especially as the advent of technologically mature solutions represents a major cost-efficiency driver.
Benefiting from the e-commerce momentum
E-commerce momentum has never been stronger, something particularly obvious in light of the recent pandemic. The sector is expected to generate over $5tn by 2026, implying a strong demand for logistics solutions such as AutoStore’s. In addition, the industry is always looking for cost-effective solutions allowing it to compress margins and take the better of competitors in what is a very disputed market. Also, the trend is towards democratizing addictive services such as same-day delivery, implying an increasingly automated supply chain.
Reversing margins trend. Compressing margins under rising-costs pressure has impacted the stock; margins reversing their downward dynamics would validate management’s strategy and be a massive trigger.
First pay-per-pick deals. The signature of the first consumption-based business models will validate management’s strategy and pave the way for a financial profile with more recurring revenues.
Thailand’s factory becoming fully operational. The opening of the plant (scheduled for 2H23) will allow fueling expansion at a lower cost profile.
Recession wiping out smaller customers. The incoming recession may benefit e-commerce giants such as Amazon, which are technologically more vertically integrated, damaging the company’s growth profile.
Cannibalization of the historical sale model. The unchecked growth of the new consumption-based model would be a larger-than-expected drag on margins, although beneficial over the longer term.
Competition from other players and technologies. Warehouse automation is a largely fragmented market and remains at an early stage; other players could take the lead with a different technology becoming standard.
Key Drivers behind our strong conviction
Inflection point reached
Baidu is surfing on improving business dynamics. The core business, online advertising, has witnessed a beginning of a recovery in the past few months thanks to consumer spending being more resilient than expected, and the 4Q22 outlook was better than feared. We expect this recovery to continue with the end of the zero-covid policy and the corresponding catch-up, offsetting a potential economic slowdown. In the meantime, the company’s cloud business is showing strong momentum, growing by more than 20% YoY in the most recent quarter, and showing strong market share gain potential thanks to a differentiating positioning.
Becoming the national AI powerhouse
The company is fully engaged in transitioning from an online advertiser to an AI powerhouse. We expect 2023 to show a pivot in this regard, with AI-based businesses becoming the dominant narrative in the equity story with the rise of advanced AI applications. Financial dominance could become a thing by the following year. With a solid technological bedrock thanks to its integrated AI-cloud platform, running on homegrown chips and powering an in-house ML framework (PaddlePaddle), and applications ranging from Natural Language Processing to AI-assisted drug discovery, the company is perfectly positioned to capture the expected application-driven explosive growth.
Taking the autonomous driving turn
Baidu is the undisputed Chinese leader in autonomous driving. After initial rollouts in 2022, which generated a lot of hype and brought the number of rides to cross the 1mn threshold, we expect 2023 to be pivotal in the field. Fully driverless robotaxi services will become widely available in larger parts of the country and on a commercial scale. While meaningful revenues are not expected before 2024, we believe investors will start to anticipate the major milestones expected next year as the company will crystallize its leading position both in terms of business and public image.
About the company
A profitable search engine
Baidu’s reputation has been built on a dominant search engine, which earned the company the easy moniker of “Chinese Google”. Focused on Chinese users, the service is hugely popular in China, with over 80% of local online searches relying on Baidu’s engine, which prioritizes local websites rather than international ones. Logically, like its U.S. peer, the search engine has become the company’s cash cow through online advertising, a very profitable business that, similarly to Google, allowed the company to diversify in adjacent web services (e.g., maps). However, due to a focus on Chinese content, revenues remain largely domestic.
Focus on cloud and AI
Like the other Chinese Big Tech players (Alibaba, Tencent and Huawei), Baidu has initiated a pivot towards cloud services, adopting a strategy mixing basic cloud infrastructure (IaaS) and integrated services (PaaS). Although the company initiated its effort much later than its peers, resulting in a fourth ranking with a ~7% market share vs. ~40% for the leader (Alibaba), its momentum is quite strong, with a 64% YoY growth in 2021 vs. 20% for Alibaba. More interestingly, Baidu has focused its efforts on advanced AI capabilities, providing turnkey AI frameworks and positioning for the shift from AI infrastructure to applications. For example, the company signed a partnership with Sanofi in the AI-assisted drug discovery segment.
The master driver
Baidu has been a historical leader in the Chinese autonomous driving ecosystem. After initial developments starting in 2013 and leading to the launch of prototypes as soon as 2015, the company was behind the development of an open-source platform named Apollo, which was initiated in 2017 with the goal of becoming the “Android of the autonomous driving industry”. Baidu has since then kept iterating and successfully passed successive milestones, appearing as the main challenger to U.S. players.
Rebound of the online advertising business. A return to online advertising growth would show a return to healthy demand, leading to a change of sentiment from investors.
Milestones in robotaxi. The autonomous driving business is generating strong expectations, but remains at an early stage. The materialization of these expectations would be a major trigger for the equity story.
Market share gains in cloud. China remains behind western countries in cloud penetration; Baidu is a challenger, and market share gains would be a strong positive.
Chinese covid policy reversal. Baidu's revenues rely on consumer spending. A return to massive lockdowns would have a clear negative impact.
Delay in autonomous driving rollout. Baidu has made a large bet on autonomous driving; a rollout delay would be a large negative for the equity story.
U.S. sanctions. Baidu relies on computing chips produced by foreign players for its advanced applications. Tightened sanctions would decrease the efficiency of the company's infrastructure.
Companies mentioned in this article
AMD (AMD); Alibaba (9988); Amazon (AMZN); Ambarella (AMBA); AutoStore (AUTO); Baidu (9888); Bosch (Not listed); Continental (Not listed); Huawei (Not listed); Intel (INTC); Meta (META); Mobileye (MBLY); Nvidia (NVDA); Qualcomm (QCOM); Samsung Electronics (005930); Sanofi (SAN); Snowflake (SNOW); Tencent (700)
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