BOTZ: AI Stocks Continue To Shine, But Challenges Lie Ahead

Among the major themes of 2023 is undoubtedly the AI revolution. Artificial intelligence stocks have captured the imaginations of consumers and investors. To nobody’s surprise, shares of companies on the front lines of AI development have soared. The Global X Robotics & Artificial Intelligence ETF (NASDAQ:BOTZ) has outperformed the S&P 500 by about 10 percentage points so far this year.

I reiterate my hold rating on the fund. While it has performed well in 2023, +37%, the valuation appears stretched while sentiment in the space is very frothy in my view.

The AI Theme Has Been Hot in 2023

According to Global X, BOTZ seeks to invest in companies that potentially stand to benefit from increased adoption and utilization of robotics and artificial intelligence (AI), including those involved with industrial robotics and automation, non-industrial robots, and autonomous vehicles. The global robotics market was valued at more than $55bn in 2021, with forecasts suggesting it could nearly double to $91bn by 2026, so says the issuer.

BOTZ is growing into a sizable ETF. Current assets under management sum to $2.5 billion, while its trailing 12-month dividend yield is modest at just 0.2% as of December 22, 2023. Share-price momentum has been solid for the last two months, after a rather steep and intense pullback from mid-July through late October. Thus, the fund can be on the risky side when compared to other ETFs holding established, blue-chip equities. BOTZ carries with it a moderate to slightly expensive 0.69% annual expense ratio, while liquidity is strong with the fund. The average daily volume over the past three months is about 1 million shares and its 30-day median bid/ask spread is low at just 0.04%, per Global X.

Digging into the portfolio, the allocation is mixed across the style box. The majority of its holdings are considered large-cap growth in nature, but there is significant exposure to risky small and mid-cap growth stocks. Just 1% of BOTZ is put in the value category. With a price-to-earnings ratio close to 30 per Morningstar, and near 45 using 2023 earnings per the issuer, it’s by no means a value ETF. What’s more, long-term EPS growth is not all that high at just 9% – that is a PEG ratio between 3 and 5 depending on what earnings numbers you apply. Factor-wise, BOTZ does have robust momentum and high-quality earnings, though.

Valuation

It’s difficult to pin a valuation on a changing ETF like BOTZ, however, I assert the fund is on the expensive side given its elevated PEG ratio. Using Morningstar’s data, the PEG is 3.1 (a 28.5 P/E and 9.1 long-term earnings growth rate). If we apply a 1.3 PEG (the S&P 500’s average), then the P/E would be 11.8. Of course, we have to look at other valuation metrics, too. BOTZ has a price-to-sales of 3.56 compared to 2.61 on the S&P 500. Thus, marking the fair value price of BOTZ closer to the low to mid-20s appears fair to me.

BOTZ: Portfolio & Factor Breakdown

What the fund lacks is significant diversification. Nearly half of the allocation is found in the Information Technology sector, and five of the 11 market sectors have no representation in the fund at all. Additionally, the top 10 positions comprise about two-thirds of the ETF. Thus, monitoring trends in the fund’s largest positions – NVIDIA (NVDA), Intuitive Surgical (ISRG), and ABB Ltd (OTCPK:ABBNY) – is important for active investors.

BOTZ: Holdings & Dividend Information

Seasonally, BOTZ tends to wobble at the very end of the year through much of the first quarter of the new year, according to data from Equity Clock. While the ETF’s history is somewhat short, returns in January through March have been mixed, with small gains in January followed by losses, on average, in the second and third months of the year. So, timing entries and exits with BOTZ is a bit more important than usual this time of year.

BOTZ: Mixed Q1 Results Historically

The Technical Take

Earlier this year, I highlighted a bearish to bullish reversal that appeared to be in the works with BOTZ. Notice in the chart below that the $25 level emerged as a key pivot point. Shares found resistance just under that mark in June 2022 and again met selling pressure there back in Q1 of this year. Eventually, the bulls took the ETF above $25 in a high-volume thrust last May. That rally helped establish the importance of the $30 to $32 zone as the current area of resistance. After a brief move under $25 during the significant Q3-Q4 correction, a year-end rally has brought BOTZ within earshot of the low $30s resistance area.

Also, take a look at the RSI momentum indicator at the top of the graph – it’s in technical overbought territory, but price action has been solid lately, with a small and tight bull flag in play. What’s more, the long-term 200-day moving average remains positively sloped, suggesting that the bulls are in control.

Overall, $30 to $32 remains resistance, while $25 and $22 are support.

BOTZ: Shares Trending Higher, $30 Resistance In Play

The Bottom Line

I reiterate my hold rating on BOTZ. I see the fund as somewhat expensive, though price action continues to be strong. I see fair value below the current price but acknowledge that a breakout above $30 could lead to a retest of the 2021 peak near $40.