BOTZ ETF: An Astute Way To Own Nvidia (NASDAQ:BOTZ) (2024)

Since I last covered Global X Robotics & Artificial Intelligence ETF (NASDAQ:BOTZ) in June 2022 in the thesis entitled “A Strong co*cktail Of Robotics And AI For The Long Term”, it has appreciated by more than 50% despite my Hold position. I exercised caution at that time due to the Federal Reserve being right in the middle of an interest rate hiking cycle, and from $20.96 a share at the time of publication, the ETF first bottomed to $18.3 which justified my cautiousness and shows that monetary policy plays a big role in determining stock market performance.

Between then and now, there have been changes in BOTZ's holdings and one of them is the doubling of the weight dedicated to Nvidia (NVDA). The semiconductor giant's market cap has now surpassed $2 trillion after it gained over 400% in less than two years, meaning it may not look attractive from a valuation perspective unless there is an alternative way to obtain exposure. This is precisely the aim of this thesis, and by using the P/E multiple together with the diversification rationale, I show that Nvidia’s shares are better owned through BOTZ.

To start with, after such an upside, it is imperative to make a strong case for investing in BOTZ, especially at a time when financial conditions remain tight.

The Reason For Investing in Robotics and AI Now

First, the global robotics market worth around $305.90 billion in 2024 is forecasted to reach $738.80 billion in 2030 which means a 15.83% CAGR growth for the long term. Second, robotics - for example robots working in an automated way in car factories - cannot exist without AI, or the software algorithms that determine the tasks being executed. The more intelligent the algorithms, the more autonomous the robotic devices produced by the likes of Japanese company Fanuc Corp (OTCPK:FANUY) or Keyence Corp (OTCPK:KYCCF) which are held by BOTZ as pictured below.

The list of holdings also includes ABB Ltd (OTCPK:ABBNY) from Switzerland which is more of an electrification play for industrial and transportation applications. Moreover, the company’s solutions include a high degree of automation which reduces the need for human intervention especially given they need to function on a 24/7 basis. This level of automation calls for innovation in electronic circuitry itself or right at the chip level, to perform advanced tasks while consuming less power. Also, automation is embedded within ABB's products themselves which makes them less visible than industrial or home appliance robots, but the company is nonetheless a key player in the space.

Looking further, UiPath (PATH), a robotic process automation company that specializes in automating certain cumbersome functions by using software, for example reading vast quantities of emails concerning a job application and actioning a set of responses for each. This is done through a software robot or one based on advanced computer codes having a high degree of autonomy. Other companies like Dynatrace (DT) are involved in cloud automation and business analytics while Nvidia provides the accelerator GPU chips in the form of the H100 to build the infrastructure for Generative AI.

Thus, BOTZ can be envisioned as providing exposure to the whole robotics and AI ecosystem, implying that it is appropriate for those looking for broader exposure to the theme. At the same time, it remains heavily concentrated in Nvidia, its main holding which, from constituting 10.16% of its weight in June 2022, has more than doubled to 21.43% as of March 1, 2024.

Nvidia's Enabler Role in AI Reaching an Inflection Point

After the buzz created by OpenAI’s ChatGPT, there is a wider adoption of chat-based interactive applications that require LLMs or large language models built using artificial intelligence. It seems that the technology has now reached an inflection point with applications like Microsoft's (MSFT) 365 Copilot, and Google's (GOOG) (GOOGL) Workspace without forgetting Adobe's (ADBE) Photoshop which all make use of Generative AI to enrich their product portfolio. For this purpose, in the absence of a competitor that can produce at scale currently, they all have to rely on Nvidia’s accelerator H100 GPU chips.

In this respect, competitor Advanced Micro Devices (AMD) with its MI300 chips is progressing rapidly, but Nvidia already has a head start, and its software platform named CUDA (Compute Unified Device Architecture) is already popular among AI developers, and the company has been innovating at a rapid pace too.

Now, judging by the sustained chip orders received during the fourth quarter of 2023, in addition to cloud service providers, enterprises themselves have started to build their intelligent infrastructures. Therefore, demand seems to be across the board, which is why I believe Nvidia should be able to sell every single chip that it can produce without forgetting the huge backlog, and, the supply chain has also improved with lead times shortening.

Therefore, an investment in Nvidia still makes sense, but the problem is that it trades at very high multiples as seen in the table below. Thus, its trailing non-GAAP price-to-earnings ratio is trading at above 180% relative to the median for the IT sector and may not be well-digested by more value-oriented investors. The same is the case for other multiples resulting in an overall valuation grade of F.

On the other hand, BOTZ trades at a P/E of only 32.1x which is 5.6 times less than Nvidia's. Therefore, even if it consists of only 21.43% or around one-fifth of Nvidia's shares, you are effectively paying for exposure to it at a much lower P/E ratio, or more than five times less than when buying the semiconductor giant's shares directly. Moreover, since it is relatively underpriced, it comes with a better margin of safety and during favorable market conditions, can appreciate faster.

As for a target, I multiplied the current share price of $31.64 by 15.83%, or the growth rate for the AI market, to obtain $36.64 for the end of this year. This is much less than the 50% upside during the last one and a half years, but being too optimistic would ignore volatility risks, just as in 2022.

A Buy after Factoring in the Risks and Considering the Diversification Rationale

At that time, volatility was caused by interest rates being hiked aggressively, and BOTZ lost about 48% of its value before recouping its losses. Now in 2023-2024, in addition to AI opportunities, some of the price action has also been driven by the prospects of a rapid easing of monetary policy with many economists expecting the first rate cut to occur as early as March. However, to be realistic, the U.S. Central Bank indicated its intent to cut rates three times this year due to consumer prices slowing down. However, at 3.1%, inflation remains above the Fed's 2% target.

Still, to be realistic, we are far from a situation where interest rates are going to be hiked as in 2022, but they can nonetheless stay higher for longer, which can result in volatility.

In these circ*mstances, to further justify my bullish position, in addition to IT and Industrials, there is BOTZ's exposure to health care which constitutes 15% of its weight as pictured below.

In this context, through the use of AI in biomedical sciences, the process of therapeutics discovery can be accelerated by more accurately predicting the efficacy and toxicity of potential drug candidates instead of relying exclusively on time-consuming and labor-intensive clinical trials. Thus, it comes as no surprise that the global AI in drug discovery market is expected to expand to $4.9 billion in 2030 from less than one billion in 2023, representing a growth of 40% CAGR which can help BOTZ to appreciate further.

In conclusion, this thesis has made the case for gaining indirect exposure to Nvidia through BOTZ which dedicates around 21% of its weight to the intelligent chip specialist, based primarily on its lower valuation.

Looking further, the VanEck Semiconductor ETF (NASDAQ:SMH) holds an even higher dosage of the semiconductor giant's shares, or 25.68% of its overall weight but remains highly concentrated in chip names. On the other hand, BOTZ provides for a more diversified approach to AI, through a broader sector exposure, or one that includes the actors involved both in building intelligent infrastructures and utilizing them. Such diversification is important at a time when higher financing costs caused by elevated interest rates constitute risks to equities, especially tech stocks, which trade at higher valuations compared to the wider market.

To this end, according to the Goldman Sachs (GS) equity team, the implied weighted average cost of capital of the S&P 500 has spiked to 5.7% which is way above the bottom of 3.8% reached in 2001, the year of the Tech Bubble. Consequently, after Nvidia's vertiginous climb of over 400%, it is preferable to invest in the stock in a diversified way which is achievable through BOTZ.

Chetan Woodun