2018 Investing Trend No. 2: Sci-Fi Technology

Editas Medicine (NASDAQ: EDIT) iRobot Corporation (NASDAQ: IRBT) Alarm.com (NASDAQ: ALRM) Mazor Robotics (NASDAQ: MZOR)

Why We Think This Trend is Going to be Massive

Having just come back from CES 2018 — a massive display of the latest technological innovations — it’s clear that what has long been considered science fiction is increasingly becoming reality. Whether it’s robots and personal assistants helping us in the home, new heights of connectivity and automation with the Internet of Things, or incredible advancements in personalized medical treatments, Sci-Fi Technology is a mega trend touching virtually every industry.

Rise of the Robots

At CES, there was a big focus on robotics both for the home and factories, ranging from robots to mow your lawn, a robot that can compete in an epic game of ping pong, and even a robot to fold laundry (sign me up). And when you combine the increasing functionality of robots with the ever-expanding capability of voice assistants (think Amazon’s Alexa or Google Assistant), it’s not a stretch to imagine robots becoming a prominent part of our daily lives within the next five years.

The robot revolution continues to gain steam in an industrial setting as well. Worldwide sales of industrial robots more than doubled between 2006 and 2016 to about 294,000 units. In North America between 2015 and 2020, industrial robot shipments are expected to double as more repetitive projects and tasks are automated.

This robotics trend is also impacting the medical space, with specialized robotic machines already helping assist surgeons to perform more precise (and less invasive) surgeries — leading to less complications and faster patient recovery times compared to freehand surgeries.

One need look no further than Intuitive Surgical to get a sense for the potential rewards for investors in this category. Intuitive Surgical is the global leader in robotic-assisted minimally invasive surgery, with its da Vinci Surgical System enabling surgeons to perform procedures as complex as open-heart surgery through incisions of just one or two centimeters.

In 2005, Intuitive Surgical was valued at less than $3 billion. Today, the company is valued above $47 billion. Despite this gargantuan rise, the market opportunity for new robotic-assisted minimally-invasive surgeries is still massive and in the early growth stages. The number of minimally-invasive surgeries performed still varies depending on the hospital and the procedure (surgeries for hysterectomies and colectomies, for instance, are still done freehand far more often than appendectomies). This leaves a compelling opportunity for businesses that build precise, specialized surgical machines and benefit from a long-term growth tailwind, just as Intuitive Surgical has done.

Connected Everything

With ever-increasing connectivity, we are in the midst of the rise of the “connected home” or so-called Internet of Things. The upcoming transition from 4G to 5G — bringing massive increases in data capacity with it — will open the door to a new wave of connectivity. Downloading a two-hour movie takes 26 hours on 3G, 6 minutes on 4G, and just 3.6 seconds on 5G.

More devices — whether it be smartwatches and fitness trackers, cars, smart speakers, lights, locks, and just about any other gizmo you can imagine — are coming online and communicating with one another, and there’s a good chance that will accelerate once 5G starts to roll out in the coming years. Gartner estimates that the number of devices connected to the internet will grow from 6.3 billion in 2016 to more than 20 billion by 2020.

As investors, this opens up an opportunity for potential winners with the companies behind the devices, the companies enabling the connectivity and computer power, and the companies building the platforms that tie all of these connected devices together. And this is not just happening in the connected home — it’s increasingly happening in “connected cities” as well.

For instance, total revenue from businesses providing connectivity platforms for the Internet of Things is expected to more than double by 2021 to over $1.3 billion. That’s a large number, but it’s just a sliver of the global Internet of Things market, now estimated to total approximately $285 billion.

Personalized Medicine

It took 13 years and cost $2.7 billion to sequence the first human genome. Today, it costs about $1,000 and takes just over a day to sequence a human genome. This phenomenal reduction in cost and time makes genome sequencing accessible to a growing number of people, and has created an opportunity for personalized medical treatments based on a patient’s unique genetic code.

In fact, in 2017 the Food and Drug Administration (FDA) in the U.S. approved the first-ever “gene-altering” treatments. As reported by The New York Times:

The treatment, considered a form of gene therapy, transforms the patient’s cells into what researchers call a “living drug” that attacks cancer cells. It is part of the rapidly growing field of immunotherapy, which uses drugs or genetic tinkering to turbocharge the immune system to fight disease. In some cases the treatments have led to long remissions.

It doesn’t get any more Sci-Fi than that. Gene editing enables an entirely new class of personalized medical treatments, with early tests suggesting significantly higher (and longer) remission rates compared to conventional treatments. Needless to say, we are watching the emerging companies in the gene-editing space very closely.

The Foolish Bottom Line

Investing inherently involves thinking about the future, and the accelerating pace of technological innovation is about as futuristic as you can get. This Sci-Fi Technology theme covers every aspect of our lives, and here you will find four U.S. companies on the forefront of these major trends.


Our Top Four Small-Cap Stocks Leading the Way in Sci-Fi Technology

Editas Medicine (NASDAQ: EDIT)

Why Editas Medicine is potentially a Hidden Gem: Editas Medicine Editas is an early-stage biotechnology company pioneering the development of gene-editing technology for human application.

Headquarters: Cambridge, Massachusetts
Website: www.editasmedicine.com
Industry: Biotechnology
Recent Price: $29.84
Market Capitalization: $1.32B
LTM Revenue: $10.96
LTM Revenue Growth: 84.3%
3-Yr Revenue Growth: N/A
Cash/Debt: $295.7/$33.7
Insider ownership: 3.55%
Amounts in USD millions
LTM = last twelve months
Data as of: January 12, 2018
Data provided by S&P Global Market Intelligence

Meet Editas Medicine…

We can’t talk about Editas Medicine without first talking about CRISPR, hailed by MIT Technology Review as “the biggest biotech discovery of the century.” CRISPR is a search-and-replace tool for DNA based on a natural immune response. When bacteria are attacked by viruses, they file away traces of viral DNA among their own repeating genetic sequences (CRISPR stands for “clustered regularly interspaced short palindromic repeats”). When paired with the protein Cas9, these sequences help the bacteria fight off the viruses when they show up again. In the lab, this same mechanism becomes a powerful gene editing tool, and it’s made gene therapy cheaper, easier, and more accurate than ever before.

Editas Medicine is an early-stage biotechnology company with the biggest head start in using CRISPR technology. Its founders include Feng Zhang of the MIT-Harvard Broad Institute and Jennifer Doudna of U.C. Berkeley, whose respective teams discovered CRISPR’s gene editing capabilities independently but almost simultaneously in 2012. Editas holds broad rights to the use of CRISPR in human therapeutics.

Like other therapies, CRISPR makes changes directly to our DNA — that is, to the genome itself. But the “scissors” that snip out genetic material can be directed exactly where they’re needed, and the hope is that insertions can be made with similar precision. That would make gene therapy much more accurate and reliable — a corrected gene could be introduced right where it’s supposed to be in the genome. CRISPR is incredibly fast and cheap compared to other existing gene therapy tools. It’s easy to set up and run experiments, make changes, and advance.

To be clear, CRISPR technology is essentially open-sourced to labs around the world. They can experiment all they want within the bounds of governing laws and ethics guidelines. But when it comes to commercial, therapeutic applications in humans, Editas has strong proprietary rights. Part of the appeal of the company is that it is taking CRISPR forward in a safe, cautious, and sensible direction.

Last year, Editas announced a partnership with Allergan aimed at curing a form of hereditary blindness. This is a smart first move for a couple reasons: First, it only involves knocking out some problem DNA, not inserting anything; and second, it is happening within the eye, which is largely isolated from the rest of the body in terms of biology. That makes for a relatively safe early test of CRISPR. Editas received $90 million up front and total deal value worth potentially more than $1 billion, plus royalties. A clinical trial is expected to begin this year.

Editas also has a partnership with Juno Therapeutics to apply CRISPR to CAR-T and T-cell receptor (TCR) cancer therapies. Specifically, the companies believe that CRISPR-engineered T-cells could go after solid tumors — far more prevalent than the blood cancers being addressed by current CAR-T approaches.

Given its status as an early-stage biotech, Editas is the riskiest and most speculative of the 16 companies we are exploring for Hidden Gems Canada. However, it arguably has the highest potential reward as well. CRISPR is likely to become an important part of biotech in the 21st century, and for now Editas is the inventory and gatekeeper of that technology. That makes it worth serious consideration for Hidden Gems Canada.

Karl Thiel contributed to this report.


 

iRobot Corporation (NASDAQ: IRBT)

Why iRobot is potentially a Hidden Gem: With iRobot, investors are getting proven consumer-facing, award-winning technology that has a first-move advantage in designing and building the early versions of Rosie the Robots.

Headquarters: Bedford, Massachusetts
Website: www.irobot.com
Industry: Consumer Discretionary
Recent Price: $86.22
Market Capitalization: $2.39B
LTM Revenue: $769.5
LTM Revenue Growth: 17.6%
3-Yr Revenue Growth: 13.7%
Cash/Debt: $278.2/$0.0
Insider ownership: 2.64%
Amounts in USD millions
LTM = last twelve months
Data as of: January 12, 2018
Data provided by S&P Global Market Intelligence

Meet iRobot…

iRobot builds robotic consumer electronic appliances focused primarily on home cleaning, including its flagship product, the Roomba vacuum cleaner. The company’s proprietary technology leverages advancements in connected home navigation, mobility, and artificial intelligence.

The Roomba vacuum has carved out a strong leadership position in the key niche of domestic robotics, and it’s helped the company establish strong brand recognition in this nascent market. The Roomba boasts more than 80% market share of robotic vacuum sales in North America.

iRobot’s successful product launches, along with its 2016 decision to double down on its consumer business, highlight the sort of execution it will need in order to maintain market leadership.

For instance, the company’s Braava and Braava Jet line of mopping robots saw revenue increase 75% in 2016, even though the Braava Jet wasn’t introduced in Asia until late 2016. Furthermore, iRobot’s recent decision to sell its defense and security business should continue to enable the company to employ greater focus on robotic innovation, leading to more rapid and effective product development in the company’s core business.

Finally, there’s still immense market opportunity. Robotic vacuum cleaner household penetration in the U.S. is still less below 10%. And if iRobot management’s prediction that the robotic vacuum cleaning segment is at an inflection point proves true, this ratio could jump significantly higher in the coming years — and iRobot is positioned to benefit.

The recent popularity of smart home technology will likely help, as it could drive consumer interest in purchasing more internet-connected devices. Products like Apple’s Home app, Amazon’s voice-activated Echo smart speaker, and Alphabet’s Google Home smart speaker are giving users more ways to interact with smart home devices and are making connected products like iRobot’s more compelling.

North America isn’t the only region that matters to iRobot, either. The company is also expanding to key international markets, including China, as well as increasing its investments in global marketing campaigns.

However, this all doesn’t come without risk, and iRobot’s primary risk is competition. As the company warns in its most recent 10-K, it faces “intense competition” from both robot providers and traditional vacuum cleaner providers. And the company expects that as the robot market expands further, competition will intensify as new entrants and expanded product lines attempt to capitalize on a growing market.

Another key risk is the company’s heavy reliance on robotic home floor-care products. All of iRobot’s revenue comes from sales of these products, so if this segment fails to gain wider acceptance, the company’s growth trajectory could be stifled.

That being said, there is no chance in, well, heck, that robotics and AI won’t be more of a daily force in all our lives over the next decade and beyond. The balance sheet is plenty packed and the company plenty profitable. And while hungry, large competitors are nibbling at iRobot’s heels, we think management will be able to fend them off (or maybe join them, eventually).


 

Alarm.com (NASDAQ: ALRM)

Why Alarm.com is potentially a Hidden Gem: Alarm.com’s cutting-edge software platform is increasingly serving as the foundation for home security and smart-home technology.

Headquarters: Tysons, Virginia
Website: www.alarm.com
Industry: Internet Software and Services
Recent Price: $39.43
Market Capitalization: $1.86B
LTM Revenue: $319.9
LTM Revenue Growth: 28.9%
3-Yr Revenue Growth: 26.9%
Cash/Debt: $84.6/$72
Insider ownership: 3.3%
Amounts in USD millions
LTM = last twelve months
Data as of: January 12, 2018
Data provided by S&P Global Market Intelligence

Meet Alarm.com…

Alarm.com makes the software (and some hardware) that powers security systems for more than 5 million homes across North America and the world. These security systems — much of which are built on mobile data systems that can withstand line cuts and power outages — are installed by one of the 7,000-plus service providers who partner with Alarm.com.

At first glance, it might seem risky for Alarm.com to rely on so many service providers, but this strategy has actually been key to the company’s success. Most homeowners prefer professionally installed security systems, especially given the increasing complexity of today’s home technologies. And while the service providers handle the installation, customer service, billing, and central monitoring stations, Alarm.com can concentrate on the background ecosystem and making everything accessible via apps on platforms like iOS, Android, Windows, Apple TV and watches, and Amazon fireTV and echo.

This capital-light strategy frees up Alarm.com to plow money into research and development to stay on the cutting edge, particularly now that home security has grown to include smart-home features — including video monitoring, energy management, and control over connected lights, locks, garage doors, and more. Alarm’s constantly improving product has helped more than double its subscriber base — both organically and via acquisition — since its IPO in 2015.

That growing subscriber base is good for more than just revenue: Alarm.com processes billions of data points from all of the connected sensors and devices running its software. It analyzes data from alarm events as well as constant monitoring of the connected devices, and compiles this data into a software engine that can intelligently create custom algorithms for individual property owners – sending an alert, for instance, if someone is accessing the property at a time of day when this typically doesn’t happen.

Although Alarm.com does make some of its own hardware, most of Alarm.com’s revenue comes from its software subscriptions. These high-margin household subscriptions — which have a gross margin of 85% — renew with Alarm.com at a 93% rate each year, leading to a reliable and recurring revenue stream. That’s the kind of security we love as investors (forgive the pun).

And with more than 130 million households in the U.S. alone and a growing number of homeowners embracing smart-home features, Alarm.com has room to continue expanding at an above-average pace for years. The company is also in the early stages of expanding overseas and into the commercial space, each of which make up less than 10% of total revenue. Alarm.com’s monitoring and remote access solutions are also particularly well suited to support the rising popularity of vacation rentals and Airbnb.

Given that Alarm.com has such a large market opportunity — and a very lucrative subscription business — it’s reassuring to see management aggressively reinvest in the business in the form of both R&D and sales and marketing. With a clear focus on driving long-term performance — rather than juicing short-term profits — Alarm.com’s best days are likely still ahead.

Seth Jayson contributed to this report.


 

Mazor Robotics (NASDAQ: MZOR)

Why Mazor Robotics is potentially a Hidden Gem: Mazor has an early lead in the robotic spinal surgeries market with its innovative surgical systems, and an expanding partnership with global medical giant Medtronic could boost growth even further.

Headquarters: Caesarea, Israel
Website: www.mazorrobotics.com
Industry: Healthcare Equipment
Recent Price: $58.81
Market Capitalization: $5.37B
LTM Revenue: $58.4
LTM Revenue Growth: 89.4%
3-Yr Revenue Growth: 40.8%
Cash/Debt: $93.3 / 0
Insider ownership: 6.37%
Amounts in USD millions
LTM = last twelve months
Data as of: January 12, 2018
Data provided by S&P Global Market Intelligence

Meet Mazor Robotics…

Spinal issues are a leading cause of disability for most adults, and about 1.5 million spinal operations are performed annually in the U.S. alone — often with less-than-ideal outcomes. Founded in Israel in 2000, Mazor Robotics has pioneered robotic surgical systems and software — the Mazor X (released in 2016) and the Renaissance (released in 2011) — that pack a powerful punch to improve patient outcomes and recovery time in spinal surgeries.

Mazor’s imaging software lets surgeons create a personalized spinal alignment plan before starting a procedure, rather than coming up with one after the operation has already begun. The surgeon can follow that plan once the hardware — a mounting platform — is attached to the patient’s spine or skull. Rather than the surgeon guiding the robot through the procedure, Mazor’s systems guide the surgeon.

Mazor estimates that minimally invasive surgical approaches — like Mazor’s robotic systems — are used in 15% or fewer of spinal fusion procedures today, but that number should increase over time as providers and patients alike embrace the benefits. Mazor’s systems reduce surgery complications and the need for revisions compared to freehand surgeries, and they get patients out of the hospital sooner — a true win-win for both providers and patients.

Just over 100 U.S. hospitals use Mazor systems today, but management estimates its addressable market in the U.S. to be more than 2,000 hospitals and surgical centers. That leaves a long growth runway, and there is also extensive opportunity internationally as well. Mazor has installed more than 170 surgical systems in 14 countries worldwide, up from 63 total systems installed in 2013.

To date, over 29,000 procedures have been performed with Mazor’s systems to place more than 200,000 implants, and the number of procedures per installed system has risen from 74 in 2014 to 85 in 2016. A growing number of installed systems (and procedures performed) help Mazor lock in recurring revenue with a razor-and-blades model, with recurring sales from spinal implants and servicing the systems now accounting for nearly half of Mazor’s total revenue.

Since May 2016, Mazor has enjoyed a growing partnership with Medtronic, the global medical device giant. Medtronic has invested a cumulative $72 million into Mazor — representing 10.6% of shares outstanding — and recently assumed exclusive worldwide distribution of Mazor X for spinal applications through 2021. Medtronic literally has a vested interest in selling more Mazor X systems, and it has an unmatched global sales force in the spinal market to boot.

The Medtronic agreement opens the door for hundreds of Mazor X systems to be installed in the next few years — which will both drive revenue growth and a march toward profitability. Meanwhile, Mazor will continue to invest in R&D, not just to expand its reach in the spinal market but also to extend the applications of Mazor X (and potentially new systems) to new surgeries. With its co-founders still at the helm, a healthy balance sheet, and a budding global partnership with Medtronic, Mazor Robotics is one we’re watching closely on the Hidden Gems radar.


John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Alphabet (C shares), Amazon, Apple, Editas Medicine, Intuitive Surgical, and iRobot. Tom Gardner owns shares of Alphabet (C shares), Intuitive Surgical, and iRobot. The Motley Fool owns shares of Alphabet (C shares), Amazon, Apple, Intuitive Surgical, iRobot, and Medtronic and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. David Kretzmann owns Amazon, Alphabet (C shares), and Mazor Robotics. Taylor Muckerman owns Amazon and Alphabet (C shares).