alvarez/E+ via Getty Images

By Sam Korus, Associate Portfolio Manager

This article on the impact of automation on the economy follows on from previous ARK research articles, What we can learn from automating the agriculture industry and The potential impact of automation on manufacturing profitability. In this article, we explore how automation could impact overall stock market valuations over the next five to ten years.

Based on the history of agriculture and manufacturing, automation and operating margins are positively correlated: as automation increases, the share of labor[1] revenue tends to decline, and as the labor share declines, operating margins tend to increase. We researched whether or not this correlation might apply to many sectors, leading to higher operating margins and stock market valuations overall.

Robot density measures the number of physical robots per 10,000 employees. Automation density converts software-based automation to “robot” density.

All other things being equal, ARK’s research suggests that in the absence of sales growth, increased automation could double operating margins and enterprise value (EV) in stock markets. by 2025. Compared to the ~25 years required to reach current levels of automation in manufacturing, economy-wide automation could reach similar levels in the next five years due to the convergence of technologies and increasing the rate of innovation. For example, the IRS reduced the time it takes to complete a task from one year to 72 hours with UiPath’s robotic process automation.[2] Moreover, the deployment of autonomous robotaxis alone could rapidly increase the density of automation. According to our latest research, automation density across all industries could increase from around 30 robots per 10,000 employees today to around 170 robots per 10,000 employees in 2025, a level consistent with robot density in manufacturing. in 2015.

According to our research, the density of robots in manufacturing has increased from 20 robots per 10,000 employees in 1991 to 176 in 2015, as shown below.

ARK Invest, robotics, robots, sam korus, blog, automation, robot density

ARK Invest, robotics, robots, sam korus, blog, automation, robot density

ARK Investment Management LLC, 2022, data from Bureau of Labor Statistics (BLS), International Federation of Robotics (IFR), “The Future of Employment: How Susceptible Are Jobs to Computerization?” Oxford Martin School, The Future of Jobs: How Sensitive Are Jobs to Computerization?

In manufacturing, while robot density has increased from ~50 to ~170 per 10,000 employees, labor compensation as a percentage of revenue has fallen by more than 10 percentage points, as shown below.

ARK Invest, robotics, robots, sam korus, blog, automation, robot density

ARK Investment Management LLC, 2022, data from International Federation of Robotics (IFR), euklems.net

In part two of this series, ARK found a positive correlation between automation and manufacturing profitability. For the economy as a whole, the same relationship seems to apply: labor compensation as a share of revenue is negatively correlated with operating margins, as shown below.

ARK Invest, robotics, robots, sam korus, blog, automation, robot density

ARK Investment Management LLC, 2022, data from yardeni.com and euklems.net

How could automation increase operating margins? Labor compensation in manufacturing as a share of revenue fell about 15 percentage points as robot density rose from 20 to 176, as shown below. If the same relationship were to apply globally, labor compensation as a percentage of GDP or national income could similarly decline over the next five years.

ARK Invest, robotics, robots, sam korus, blog, automation, robot density

ARK Investment Management LLC, 2022, data from euklems.net, International Federation of Robotics (IFR)

*Note that the robot density does not reach 200 as in the first graph, because the dataset for the share of the US manufacturing workforce only goes to 2015.

Automation has had a much greater impact on the profitability of farming than manufacturing, as shown below. Each percentage point drop in labor compensation as a share of revenue increased farm operating margins by 3.8%, more than 12 times the 0.3% in manufacturing, as shown the slope of the lines below. Across all industries, if labor compensation as a share of revenue were to decline by the same 15 percentage points as in manufacturing, companies’ operating margins would double to around 20%.

ARK Invest, robotics, robots, sam korus, blog, automation, robot density

ARK Invest, robotics, robots, sam korus, blog, automation, robot density

ARK Invest, robotics, robots, sam korus, blog, automation, robot density

ARK Investment Management LLC, 2022, data from Bureau of Labor Statistics (BLS), International Federation of Robotics (IFR), euklems.net, Bloomberg, Agricultural Productivity in the US, yardeni.com

Based on discounted cash flow models, a doubling of operating margins would double the multiple of firm value over sales.[3] For example, the Russell 3000 could double its “just” EV/sales multiple by around 2.2[4] to nearly 4.5, with no growth in revenue, solely due to increased automation profitability, as shown below.

ARK Invest, robotics, robots, sam korus, blog, automation, robot density

ARK Investment Management LLC, 2022, data from third party (Bloomberg)

That said, everything else may not stay equal, suggesting that automation could impact metrics other than operating margins, including wages, prices, and capital investment. Wages and capital investment could rise more and prices less than they otherwise would. In turn, real GDP could be higher and return on invested capital (ROIC) lower than it would otherwise be.

Additionally, history suggests that some industries and businesses will automate quickly, increasing productivity, profitability, and sales, while others will fall behind. The impact of automation on the whole economy could be catalyzed. Indeed, a handful of innovative companies could adopt automation early and aggressively, operating far more cost-effectively than others and catalyzing adoption across the economy.

1. Labor share is the percentage of profits that are paid out as wages.

2.https://www.bloomberg.com/press-releases/2022-02-01/irs-implements-robotic-process-automation-technology-from-uipath-within-its-finance-and-procurement-divisions? sref=1f7Aj053

3. http://www.rgquintero.com/media/91f679831d8e9521ffff80e8ffffe906.pdf

4.Based on average Russell 3000 operating parameters from 1991 to 2018.

Warning:

©2021-2026, ARK Investment Management LLC (“ARK” ® “ARK Invest”). All content is original and was researched and produced by ARK, unless otherwise stated. No part of ARK’s original content may be reproduced in any form, or referred to in any other publication, without the express written permission of ARK. The Content is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation regarding products or services to anyone who is prohibited from receiving such information. under the laws applicable to their place of citizenship, domicile or residence. Some of the statements contained on this website may be statements of future expectations and other forward-looking statements based on ARK’s current beliefs and assumptions, and involve known and unknown risks and uncertainties that could cause a material difference between actual results, performance or events. of those expressed or implied in such statements. All content is subject to change without notice. All statements made regarding companies or securities or other financial information on this site or any site linked to ARK are strictly beliefs and views held by ARK or the third party making such statement and are not endorsements. by ARK of a company or title or recommendations. by ARK to buy, sell or hold securities. The content presented does not constitute investment advice, should not be used as the basis for any investment decision, and does not purport to provide legal, tax or accounting advice. Remember that there are inherent risks in investing in the markets and that your investments may be worth more or less than your original investment when redeemed. There is no guarantee that ARK’s objectives will be achieved. Further, there can be no assurance that the investment strategies, methods, sectors or programs herein have been or will prove profitable, or that any investment recommendations or decisions made by us in the future will be profitable for any investor or customer. Professional money management is not suitable for all investors. For complete information, please see our Terms and Conditions page. The advisor did not pay any fees to be considered or to receive the scholarships. The Advisor did not pay any fees at the granting of the Awards for the right to promote the Advisor’s receipt of the Awards and the Advisor was not required to be a member of any organization to be eligible for the Awards. For full reward disclosure, please see our Terms and Conditions page. Past performance is not indicative of future performance.

Original post

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.