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Teradyne’s Robot Business Proves Co-Bot Market is Real and Inflecting

Teradyne’s Robot Business Proves Co-Bot Market is Real and Inflecting

Special thanks to Austin Bohlig for his work on this note. 

We believe we are seeing a paradigm shift in the manufacturing sector, where robots and humans are beginning to work together side-by-side. These robots that are working alongside people (not in caged environments) are known as collaborative robots (co-bots). Over the last few years the co-bot market has been one of the fastest growing robot industries. In mid-2015, Teradyne (TER) acquired the leading collaborative robot manufacturer in the world, Universal Robots (UR), for $285M. We view UR as one of the leaders in the space, and the best proxy for aggregate market trends. On Wednesday afternoon, Teradyne released Q2 results, which leave us incrementally more confident in the future of collaborative robots. Based on these results, we have a few key takeaways about the quickly emerging co-bot market:

Collaborative robots are built with multiple vision- and force-detecting sensors, which make it safer for these systems to collaborate alongside humans. Programming co-bots is also less sophisticated than traditional robots, reducing costs and improving flexibility.

Co-Bot Market Remains On Pace To Double in 2017

Teradyne reported the Universal Robot business generated $39M in sales, up 56% y/y, and 1H17 sales of $76M, up 81% over 1H16. Teradyne management expects  to achieve 50%+ growth in 2017 in their robot business. Before its acquisition, UR was one of only a few collaborative robot manufacturers in the world. Given the massive market opportunity, many of the legacy robot OEMs and startups alike have since entered the space. We believe the co-bot market is big enough for many players to succeed, and the need for specialization makes a monopoly outcome unlikely.

We believe the total co-bot market increased ~150% y/y to $260M in 2016. This equates to approximately 8,950 units, assuming $29K ASPs. While Universal Robots did not disclose unit shipments in the quarter, the company stated in their most recent 10K their install base exiting 2016 was ~12K. Based on other company reports and internal assumptions on ASPs, we believe the company shipped ~4,180 robots in 2016. Assuming a $24K ASP, we believe UR controls approximately 38% of the co-bot market exiting 2016. Although the market looks small today, we believe we have approached an inflection point and anticipate the aggregate co-bot market more than doubling in 2017 to $680M. By 2025 we believe the industry will ship over 434K co-bots per year and equate to a ~$9.2B market. This growth implies a 56.5% CAGR. Over that same timeframe we anticipate UR will sustain their leading market position, but also see a huge opportunity for startups and legacy robot providers to take advance of this fast growing market.

Co-Bots Are Expanding Out of Manufacturing and Now Making Our Omelets

Key drivers of co-bot demand include: human collaboration, lower costs and functional flexibility. The manufacturing industry has been the largest adopter of co-bots thus far, where co-bots are used for manufacturing techniques such as CNC machining, injection molding and other pick-and-place applications. However, we were intrigued by Teradynes’s comments that many new applications for co-bots are beginning to surface within the services industry. For example, management highlighted the use of co-bot arms in rehabilitation therapies such as muscle massaging. Some restaurants are even beginning to use UR robots to make omelets. These comments show the flexibility of co-bots, and when we consider the number of applications outside of manufacturing, we believe our $9.2B market opportunity in 2025 is likely underestimating the true potential of this market.

Co-Bot Adoption Continues To Be A Global Theme

From a geographic perspective, we believe the inflection in co-bot demand is a global theme; however, we do anticipate certain regions to adopt the technology faster than others. For example, over the next 10 years we believe China will be one of the fastest adopters, and UR specifically said their robot business doubled in this region in Q2. We believe rising labor costs, as well as government subsidies, will promote robot adoption in China. In addition, we see growth in United States driven by the demand for retrofitted automation processes to offset rising labor costs.

Bottom Line

We were encouraged with Teradyne’s Universal Robot results in Q2, which we believe validate the massive opportunity in the co-bot market. We believe we have hit an inflection point for co-bot demand. Traditional industries and new markets alike are finding meaningful value in collaborative robots, which could drive 50%+ annual growth through 2025 and create attractive investment opportunities.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Robotics
3 min. read Show less
Tesla’s Breakout Will Take Longer But Will Be Bigger Than You Think

Tesla’s Breakout Will Take Longer But Will Be Bigger Than You Think

We are publishing our Tesla model with forecasts out to 2023. We’re believers that Tesla will play a central role in two upcoming paradigm shifts: 1) EV and autonomous transportation, and 2) renewable energy – driven by Tesla’s core competencies in AI and robotics. We believe patient shareholders will be rewarded and expect 2023 to be a breakout year for the company.

Where we’re different than other positive views. We think the Tesla story will take longer but will be bigger than most positive outlooks anticipate. Specifically, we expect it will take 2 years longer for Tesla to hit an inflection point, as defined by manufacturing 1 million cars per year, and at that time (2023) growth rates will accelerate. Our estimated growth in units delivered goes from 30.4% in 2021 to 62.7% in 2023. Ultimately, we believe Tesla will deliver nearly 1.6M cars in 2023. To put this in perspective, BMW sold 2.3M cars in 2016. We believe that this massive ramp is achievable; as more Model 3s and Model Ys enter the marketplace, more consumers will become aware of the benefits of a Tesla. In addition, the vehicles themselves will cost less, primarily due to better production methods.

A thought on timing. Shares of Tesla fluctuate based on timelines; for example, product announcements, preorder numbers, deliverables, and commentary around future production are acute events that have created fluctuations in shares. We expect continued fluctuations in timing over the next five years, and believe shares of Tesla will have dramatic moves (both down and up) around those timing announcements. Despite this expected volatility, we remain confident in the themes that we are laying out, and that Tesla will be a catalyst and a beneficiary of the paradigm shift to both EV and autonomy. We see the quarter-to-quarter timing as less important than the bigger picture of Tesla’s role in this next wave. In addition to timelines, legislation is going to have a dramatic impact on Tesla’s future. Even though Tesla’s vehicles are expected to be fully autonomous within the next few years, it is highly unlikely that legislation will allow for that update. Full autonomy is touched on more when we discuss Tesla Fleet.

Tesla deliveries will continue to build with an inflection point in 2023. We believe that Tesla will deliver just over 100,000 vehicles in 2017, including 6,000 Model 3 units. Elon Musk has shared that by the end of 2017, Tesla will be producing 20,000 Model 3s per month. While there is sufficient demand for that many Model 3s, we believe that the actual delivery of the vehicles takes time. In 2018, we believe there will be just under 310,000 vehicles delivered, including 217,200 Model 3 units. Right now, it’s estimated that there are over 500,000 Model 3 reservations. If one were to order a Model 3 today, expected delivery would be in January of 2019. We feel that there is sufficient demand for the Model 3, and that Tesla’s biggest challenge when it comes to delivering over 300,000 vehicles in 2018 is whether or not it can produce that many. In other words, the demand is there, and the ball is in Tesla’s court to deliver. When it comes to the Model S and Model X, we expect quarterly deliveries to begin to decline with the introduction of the Model 3, and eventually, the Model Y. While there will still be demand for these premium vehicles, the introduction of both the Model 3 and Model Y will lead to some cannibalization of sales.

Speaking of the Model Y, we believe that Tesla will introduce the Model Y in 4Q19. Elon Musk has stated publicly that the Model Y can be expected in 2019. We chose to take the conservative estimate on launch timing, and think it will happen at the end of the year. Long-term, we think the Model Y will be more popular than the Model 3.

SolarCity acquisition a long-term bet on renewable energy. Tesla does not exist to simply build great electric vehicles. Self-driving automobiles are just one part of Tesla’s ambitions as an energy company, as evident in their mission statement:

Tesla’s mission is to accelerate the world’s transition to sustainable energy.

Tesla acquired SolarCity less than a year ago. While we are big believers in the long-term strategy of providing consumers all of the necessary pieces to generate and store energy, we think it will take some time to integrate the two businesses, or more specifically, for SolarCity to adopt Tesla’s culture and operational style. Long-term, we believe that Tesla’s energy generation and storage will become a much larger part of its business. When SolarCity was acquired, Elon Musk stated that “SolarCity may add $1B to Tesla Revenues in 2017.” We are less optimistic, and believe that it will add $864M to Revenue in 2017. We believe the energy generation and storage business will grow by 10% in 2018, 15% in 2019, 25% in 2020, 40% in 2021, and be growing at 50% annually in 2022 and 2023. By 2023, energy generation and storage would be a $4B business for Tesla.

Tesla Fleet has a promising future. In simple terms, a fleet platform from Tesla would allow for an owner’s Tesla to be its own “Uber” while they are at work, at school, or asleep. In theory, you could lend your car out to anyone, whenever you want, and make money through the platform when you’re not using your Tesla. During a TED talk in late April, Elon Musk even went as far as to say their ride sharing program will eventually be cheaper than public transportation. Today, Uber drivers make an average of $19 per hour, which, if calculated at 40 hours per week, adds up to $39,492 annually.  It is not likely that owners would lend out their cars this often or at this rate, but this extra compensation (in addition to reduced parking costs) bodes well for future Tesla owners. This option for autonomous vehicles may come sooner than previously thought, with Musk publicly stating that he believes Level 5 (fully autonomous) production to be possible in two years, looking at late 2019 or early 2020. While production of Level 5 vehicles may be available within this two-year time frame, mass adoption and ride-sharing will most likely be held back by governmental legislation and consumer hesitation.

Expect a Tesla Semi announcement this fall; but it will take a long time to bring to market. Over the course of the past year, Elon Musk has been slowly releasing information regarding one of Teslas’s many ongoing projects: Tesla Semi, to be officially unveiled this September. This program is led by Jerome Guillen, the company’s former Model S Program Director and VP of Vehicle Engineering. Musk describes the vehicle as a “heavy-duty, long range semi truck” that will maintain the highest weight capability and long range, meant to alleviate the heavy duty trucking loads. A class 8 diesel truck has a load limit of 80,000 pounds, maxing out with a load around 40,000 due to the truck’s own weight of approximately 35,000 pounds. When asked how the electric semi would size up to current diesel models, Musk’s comments lead us to think there will be little to no competition. The Tesla Semi will have a flat torque compared to a diesel truck’s curved torque, allowing the electric truck to “out-torque” any diesel semi. Musk said that if the Tesla Semi and a diesel truck were in a tug-of-war competition, the Tesla would “tug the diesel semi up hill.” The company’s goal for this project, as stated by Musk, is to “deliver a substantial reduction in the cost of cargo transport, while increasing safety and making it really fun to operate.”

Tesla Profitability in 2021 or later. We believe Tesla’s Revenue will reach $11B in 2017, up 60% from 2016. By 2023, we believe Tesla’s Revenue will be $77B and growing at 55%. When it comes to EPS, we believe Tesla will become profitable in 2021, and ultimately reach an EPS of $28.09 in 2023. We expect Gross Margins to be 23.4% in 2017, and step down slightly to 23.2% in 2018, before climbing slowly, reaching 30% in 2022. The key to achieving 30% Gross Margins lies in Elon Musk’s compensation plan. Elon Musk stands to earn $1.6B in stock options if he can achieve 10 milestones by 2022. Once the first Model 3 is produced and delivered later this week, the two remaining milestones are: aggregate of 300,000 vehicles (at 230,000 after 2Q17), and four consecutive quarters of Gross Margins at 30% or higher. We think Tesla will reach both of these outstanding milestones.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Artificial Intelligence, Robotics, Tesla
5 min. read Show less
iRobot’s Dominance Shows That Making A Robot Is Hard

iRobot’s Dominance Shows That Making A Robot Is Hard

Special thanks to Austin Bohlig for his work on this note. 

We believe the domestic robot market, which includes robotic vacuums, mops, and lawnmowers, is one of the most promising sub-categories within the robotics space. Following iRobot’s Q2 results, we are incrementally more bullish on domestic robots. iRobot recently released Q2 results, which exceeded expectations across the board, and the company raised full-year guidance, which now implies ~25% y/y growth in the consumer robot business (excluding the acquisition of a distributor, Robopolis). Following these positive results, as well as recent conversations we’ve had with other leading robotic vacuum cleaning companies, we see four key takeaways:

Takeaway #1 – Making A Robot is Hard!

Some argue that increased competition from legacy vacuum cleaner makers will threaten the opportunity for robotics startups, but iRobot has continued to flourish and we believe it comes down to the fact that making a robot is not easy. In other words, it’s easier for a robotics company to build a vacuum than it is for a vacuum company to build a robot.

It’s easier for a robotics company to build a vacuum than it is for a vacuum company to build a robot.

Although a Roomba vacuum cleaner may look simplistic on the outside, the advanced software programming, computer vision systems and engineering acumen that goes into developing a high-performing robot is difficult to replicate. We believe iRobot’s consistent outperformance validates our thesis. While iRobot has stated they are seeing increased competition in the low-end vacuum market, we believe iRobot remains a clear market leader in the high-end category. We do believe there are other companies bringing impressive domestic robots to market, including Neat0 Robotics, Ecovacs and Samsung, but similar to iRobot, these are companies with a competency in robotics, which provides them a distinct advantage over legacy vacuum players. And this applies to robots with other domestic functions, including lawn mowing, snow removal, etc. Again, it’s easier for a robotics company to design for a specific function than it is for a legacy player to build a robot, which is why we see so much opportunity in the robotics space.

Takeaway #2 – The Domestic Robot Market May Be Larger Than We Thought.

In early June, we published a 6-part series on the future of robotics: IntroIndustrialCommercialDomesticMilitary, Social and Entertainment, Software. In our domestic robot piece, we forecast the total domestic robot market to grow 17.1% in 2017 to $1.7B, including 16.5% y/y growth in robotic vacuum cleaners. However, iRobot’s total robot revenues increased 24.2% y/y and the company raised full year 2017 guidance, which now implies 25.0% y/y growth in their robot business.  Given iRobot’s positive outlook and other conversations we’ve had with leaders in the space, we believe our estimates are likely conservative.

Takeaway #3 – It’s Not Just About Vacuum Cleaners.

iRobot’s revenues from wet floor mops increased 80.0% y/y, which was driven by strong demand both domestically and internationally. Robotic vacuums are no longer the only form of automation entering the home. We believe consumers are becoming more comfortable with other kinds of domestic robots such as mops and lawnmowers. And domestic robots is just the beginning of the much larger connected home theme. Given these robots are now equipped with advanced computer vision technology, they can map an entire household. The CEO of iRobot recently highlighted how they are considering selling this data to larger companies like Amazon, Facebook and Google to create new consumer applications.

Takeaway #4 – Domestic Robots Is A Global Trend.

While iRobot saw the strongest growth for robots domestically (revs up 46% y/y), the company is also upbeat about the growth they are seeing internationally. For example, the company expects to see high-teens growth in EMEA and 20%+ growth in Japan in 2017. Due to market variances by geography, we believe different domestic robot categories will flourish in different parts of the world. For example, Asian households have more hardwood floors and less carpet, so demand for wet floor robots will outperform in this region. In addition, although iRobot doesn’t have a robotic lawnmower commercially available yet, this market is seeing strong adoption in European countries because of the relatively smaller lawn sizes. Regardless, we believe that, in aggregate, consumers are increasingly comfortable with robots in the home.

Bottom Line

iRobot’s results are encouraging for the entire robotics community, validating consumer demand for robotics and automation in the home. We believe the domestic robot market will be one of the strongest robotics sub-categories over the next 10 years. Following iRobot’s revised expectations for 2017, we believe that our near-term forecasts are likely conservative and that the best is yet to come.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Robotics
3 min. read Show less