How investors can profit from the rise of the robotics industry

Robotics is poised to gain from aging population and shrinking workforces. Here’s how to invest in the field

Office workers talking to a colleague on  an AVA 500 robot

iRobot’s AVA 500 enables remote collaboration on the go. (iRobot)

Long the subject of science fiction, robots have suddenly become a here-and-now phenomenon. The Roomba, a self-directed vacuum cleaner, is cleaning our floors. Self-driving cars are venturing onto public roads, and robots outnumber workers in factories. There’s even a robot-staffed hotel in Japan.

Worth US$10.7 billion in 2014, robotics could become a US$83-billion industry by 2020, according to a Bank of America Merrill Lynch report. While advances in artificial intelligence enable new applications, robots already on the market are steadily getting cheaper. Costs have come down by about 25% over the past five years, and they could fall another 20% over the next five, says Travis Briggs, CEO of Robo Global, an investment firm that developed its own 85-stock Robotics & Automation Index ETF (Nasdaq: ROBO).

Demographic issues are also driving demand for automation technology, Briggs says. Both Japan and China, which have aging populations, have called for robot revolutions. In Japan, Prime Minister Shinzo Abe has said he wants to invest ¥660 billion ($7.9 billion) in the country’s robotics market—a big part of which will be devoted to helping care for the country’s elderly. China has pledged to invest billions to increase automation in manufacturing.

Here in North America, even depressed industries like oil and gas are spending on automation—it can be a way to cut costs. Auto companies bought almost one out of every two industrial robots sold in 2014, the Bank of America report noted. As the demand for robotics expands, so too will the investing opportunities, says Ashley Misquitta, the lead portfolio manager on Mackenzie Investments’ U.S. Growth Class fund.

Misquitta thinks the best opportunities are in pure-play outfits that are building robots for other companies, rather than diversified players like Alphabet Inc. (Nasdaq: GOOG) or Tesla Motors Inc. (Nasdaq: TSLA). He favours companies that are already making money over those in the pre-revenue stage.

Though you’re buying such companies for their long-term potential, you can’t ignore short-term performance, adds Randy Bateman, president and CEO of Balcones Investment Research. As he does when looking at any technology startup, Bateman pays a lot of attention to management; he wants to be sure the executive team is committed to seeing the venture through. “You don’t know when there’s going to be a payoff,” he says.

In addition to robot makers, Bateman likes to invest in companies using robotics to improve their operations. He looks for early adopters in a variety of industries whose margins are growing as a result of automation (as opposed to other factors, such as cheaper inputs).

Again, robotics is a long-term play. ROBO actually lost 5% in U.S. dollar terms in 2015. And, like the tech sector in general, most robotics companies don’t come cheap. iRobot, the best-known consumer robotics brand, is trading at 28 times earnings. However, its growth potential is massive, which justifies the lofty multiple, says Misquitta.

Instead of fearing the rise of the machines, profit from it instead. “The whole notion of robotics is broad and changing,” Misquitta says. “We still don’t know what’s really going to happen yet, but the industry is growing.”