iRobot Corporation Investment Thesis

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iRobot Corporation

Ticker: $IRBT

Sector: Technology

Market Cap: $2.5 billion

Overview

iRobot is a global consumer robot company that designs and builds robots that empower people to do more in and around their homes. iRobot consumer robots help people find smarter ways to clean and accomplish more in their daily lives by delivering a better way to clean that frees people from repetitive, time consuming home cleaning tasks. iRobot's portfolio of floor cleaning robots features proprietary technologies for the connected home and advanced concepts in cleaning, mapping and navigation, human-robot interaction and physical solutions. Leveraging this portfolio, iRobot is building an ecosystem of robots to help realize the smart home’s potential. For the past two decades, iRobot has been a pioneer and leader in consumer robotics, robotic floor care and robotic artificial intelligence.

All of their WiFi-connected floor cleaning robots benefit from iRobot Genius Home Intelligence, a robot platform that unlocks an expansive range of digital features and experiences to give users an unmatched level of personalisation and control over their cleaning robots, accounting for their unique homes, schedules, cleaning preferences and smart home integrations. 

iRobot products consist of the following robot families:

Roomba

Multiple Roomba floor vacuuming robots at varying price points ranging from approximately $250 to $1,099 based upon features and performance characteristics. The Roomba robots vacuum away dust, dirt, and debris from hard floors and carpets using a V-shaped brush and powerful suction. Edge-Sweeping brushes grab debris from along walls and corners.

Braava

Automatic floor mopping robots designed exclusively for hard-surface floors at price points ranging from $199 to $450. The Braava robots automatically dust and damp mop hard-surface floors using popular cleaning cloths or specially designed reusable microfiber cloths and include a special reservoir that dispenses liquid throughout the cleaning cycle to keep the cloth damp. Roomba Combo Robot Vacuum & Mop robots are also available.

Root

Robots designed to help children learn how to code. These products help broaden the impact of their STEM (science, technology, engineering and mathematics) efforts and reinforce their commitment to making robotic technology more accessible to educators, students and parents. The Root coding robots, priced at $129 and $199, are designed to make coding easy and natural to learn. Using the engaging Root Coding App, kids of any age can learn coding fundamentals while they play, explore, and create.

Since the introduction of the Roomba robotic vacuum cleaner ("RVC") in 2002, iRobot has sold more than 30 million consumer robots worldwide to become a global, market-leading consumer robotics innovator with a strong presence in major geographic regions worldwide. 

Customers

As of Q1 2021, iRobot has 10.7 million connected customers. iRobot defines connected customers as “individuals who have registered to receive digital communications (in-app messaging, email or both)”. During 2020, connected customers increased by over 80% from 2019.

iRobot sells their products through distributor and retail sales channels, as well as their on-line store. For the year ended 2020, 2019 and 2018, sales to non-U.S. customers accounted for 47.9%, 50.3%, and 48.7% of total revenue, respectively. 

For the year ended 2020, 2019 and 2018, iRobot generated 22.7%, 21.3% and 17.3% of total revenue, respectively, from one of their retailers. This retailer has not been confirmed but my suspicion is Amazon. The Roomba 692 Robot Vacuum was one of the best selling items during the 2021 Amazon Prime Day.

In the United States, Canada, Japan and across much of Europe, iRobot sells our products primarily through a network of retailers. Throughout the rest of the world, iRobot products are sold primarily through a network of in-country distributors who resell to retail stores in their respective countries. iRobot retail and distributor networks are the primary distribution channels for their products. 

Complementing the retail and distributor networks is a growing direct-to-consumer sales channel. For the fiscal year ended 2020, 2019 and 2018 direct sales to consumers accounted for 10.5%, 5.8% and 4.4% of total revenue, respectively. This is an important development as it results in a far better margin for iRobot.

Capitalisation

iRobot went public on the 9th November 2005 through an IPO raising an initial $115 million valuing the company at $750 million. Today the market market cap is $2.5 billion meaning if you had invested at the IPO date you would have 3x your initial investment in almost 16 years. 

Revenue and Margins

iRobot has been growing revenues at a steady rate over the past couple of years. During its most recent financial results for Q2 2021:

  • Revenue was $366.6 million, an increase of 31% year-over-year. 

  • Vaccum revenue was $323 million, an increase of 29% year-over-year. 

  • Mopping revenue was $43 million, an increase of 48% year-over-year. 

Gross margin was 38% in Q2 2021 compared to 64% in Q2 2020. Q2 2020 benefited from a Section 301 tariff exclusion which later expired.

This level of growth is not a once off as iRobot has a demonstrated track record when we look back over the last 2 years.

iRobot recorded an operating loss of $3 million at Q2 2021 compared with an operating profit of $70 million at Q2 2020 as a result of the tariff exclusion. 

For the full year 2021, iRobot management estimates revenue of $1.58 billion which would represent an increase of 11%. This revenue guidance was downgraded from $1.69 billion at Q2 as a result of the semiconductor chip shortage. During Q2, iRobot could not fulfill $17 million of orders due to supply chain constraints. I think it is important to allude to the fact that this revenue downgrade is a supply issue and not a demand issue.

Valuation Multiples

Whilst iRobot is very much a growth stock from my perspective, its current valuation multiples appear that of a value stock. Below are some of the key valuation metrics that I have identified. 

While the Price/Sales valuation multiple has reduced by 10% over the past 12 months, revenue has actually increased by 30% during the same period. With a Price/Sales of 1.51 and gross margins of 38% iRobot is very attractively valued at the moment. For comparison, Apple has a gross margin of 43% but trades at a Price/Sales of 6.93.

Balance Sheet and Cash Flow

Commentary

  • Over $416 million in cash and cash equivalents

  • Total Liabilities as % of Total Assets is 31% 

  • Current Assets to Current Liabilities ratio of 2.9

  • Goodwill balance making up just over 10% of total assets which primarily relates to the acquisition of Robopolis in Q3 2017

  • Trailing 12 month free cash flow at Q2 2021 is $171 million

Stock Price History 

The share price had been trending sideways for almost a decade before initially taking off in 2017. The stock hit its most recent all time high in January 2021 following a short squeeze as you will see below.

Competitors

The market for household robots is moderately consolidated due to the presence of a few companies dominating the market. Also, the further development and commercialization of these products are expected to attract new entrants in the market.

Major companies in the household robots market include: 

  • iRobot (US)

  • Neato (US)

  • Samsung (South Korea)

  • Ecovacs (China)

  • Alfred Kärcher (Germany)

  • LG (South Korea)

  • Dyson (UK) 

Neato is one of the key competitors to iRobot in the household robots market. The company is engaged in the manufacturing and selling of automated robotic vacuum cleaners for floor cleaning under the Botvac product line-up. The company focuses on introducing evolutionary features to its line-up. It includes features such as laser navigation, wireless connectivity, smart watch support and app connectivity in its models, which helps it differentiate itself from others.

In addition, the company also pioneered its unique D-shaped robotic vacuum to clean corners more effectively. The designing of these robots is done in the US, while contract manufacturing is done in China. Neato was acquired by Vorwerk in September 2017. However, the company operates within the Vorwerk Group as a wholly owned independent business unit, with its own brand identity with no changes in the leadership or daily operations. Vorwerk Group is the parent company of Neato Robotics.

Management and Ownership 

iRobot was founded in 1990 by Massachusetts Institute of Technology roboticists Colin Angle, Rodney Brooks and Helen Greiner with the vision of making practical robots a reality. Colin Angle is the co-founder of iRobot and has served as chairman of the board since October 2008, as chief executive officer since June 1997, and prior to that, as president since November 1992. He has served as a director since October 1992. Colin previously worked at the National Aeronautical and Space Administration’s Jet Propulsion Laboratory where he participated in the design of the behavior controlled rovers that led to Sojourner exploring Mars in 1997. 

Colin Angle appears to be very well received at iRobot with an 99% approval rating on Glassdoor with the company overall scoring 4.3 out of 5 by its own employees. 

In Colin Angle, iRobot meets my criteria of being led by a visionary founder

Risks

1. Intellectual Property and Technology

iRobot rely primarily on patents, trademarks, copyrights, trade secrets and unfair competition laws, as well as license agreements and other contractual provisions, to protect their intellectual property and other proprietary rights. Currently, iRobot has accumulated more than 1,500 patents worldwide.

Significant technology used in their products, however, is not the subject of any patent protection, and iRobot may be unable to obtain patent protection on such technology in the future. Moreover, existing U.S. legal standards relating to the validity, enforceability and scope of protection of intellectual property rights offer only limited protection, may not provide iRobot with any competitive advantages, and may be challenged by third parties. In addition, the laws of countries other than the United States in which they operate may afford little or no effective protection of their intellectual property. There is a risk that iRobot may be unable to prevent third parties from infringing upon their intellectual property or otherwise gaining access to their technology. Unauthorized third parties may try to copy or reverse engineer their products or portions of their products and use their intellectual property. If iRobot fails to protect their intellectual property and other proprietary rights, the future prospects for the company would be uncertain.

2. Competition

As touched on earlier, there are a number of companies that are developing robots that will compete directly with iRobot product offerings. Competition includes established, well-known sellers of floor cleaning robots such as Ecovacs as well as new market entrants. Many current and potential competitors are larger in size and more broadly diversified with substantially greater financial, marketing, research and manufacturing resources than iRobot possesses. iRobot also faces competition from manufacturers of lower-cost devices, which has further driven down the average selling price in the marketplace for floor cleaning products. Competition also exists from providers of traditional vacuum cleaners.

The global market for robots is highly competitive, rapidly evolving and subject to changing technologies, shifting customer needs and expectations and the likely increased introduction of new products. The ability of iRobot to remain competitive will depend upon ongoing performance in the areas of product development, operating efficiency and customer support.

Some competitors aggressively discount their products and services in order to gain market share, which has resulted in pricing pressures, reduced profit margins and lost market share. In addition, new products may have lower selling prices or higher costs than legacy products, which could negatively impact gross margins and operating results.

Opportunities

1. Large and expanding addressable market

The household robots market stood at a value of nearly $3 billion in 2020 and is expected to register a CAGR of 20.50% between 2021 and 2025 according to research from Mordor Intelligence. This could see the market trebling to over $9 billion by 2025. The household robots are also termed as domestic robots, which are the part of autonomous service robots for carrying out mundane works, such as floor cleaning, pool cleaning, and lawn mowing, but they can also be used for education, entertainment, and elderly assistance. 

Technological advancements are enabling household robots to become more practical and usable day by day. This is driving the consumer demand and acceptance of such products. Rising consumer demand for autonomous robotic technology, along with minimization of human intervention, is another factor driving the market.

Among all the household robots, automated vacuum cleaners and moppers are the most commercialized and developed products by the companies. The companies are continuously investing in developing more compact and integrated vacuum cleaner and mopping robots to reach narrow places at home. The companies are integrating advanced technologies, like voice recognition and laser-based technologies, to map the floor structure. For instance, iRobot launched a Roomba i7+, which is capable of acquiring voice commands and intelligent mapping techniques.

Additionally, with the increasing developments in the machine vision cameras, companies are also using these 2D and 3D machine vision cameras with AI technologies to effectively map edges of the floor, like a staircase, and recognize obstacles, such as cables, dustbins, doorsills, and rugs.

Asia-Pacific (APAC) is expected to witness the largest share of the household robots market over the next five years. Growth of household robots in the APAC region is strongly correlated with consumer demand in the region. Increase in investment toward household robots, especially in countries such as China, Japan, and South Korea is driving the market in this region. China is expected to register the highest growth compared with other countries in APAC. 

Covid-19 enhanced the need for increased domestic hygiene and with more of the workforce shifting towards remote working, the demand for household robotics is headed in an upward trajectory. 

2. Robotics-as-a-Service (RaaS)

I’d expect most readers have heard of Software-as-a-Service (SaaS). The premise behind these “as-a-Service” implementations is to democratize the technology while lowering the barrier to entry for potential customers. RaaS takes the capabilities of robotics and removes the upfront cost. RaaS is a cloud-based “robotic rental” system that allows users to incorporate the capabilities they need when they need them, upgrade or downgrade systems as requirements change, and install robotics without requiring the necessary infrastructure required by more traditional robotics implementations. 

iRobot’s RaaS offering is iRobot Select. With this membership, customers get the Roomba i7+ robot vacuum along with dedicated customer support, robot accessories like new filters delivered right to your door, and a protection plan designed to keep your robot running at its best for $29 per month. 

The benefit of iRobot Select is that it offers an optimised value proposition to customers who otherwise might not be able to afford the one off cost of the Roomba. This service is also very scalable from an iRobot perspective and should favourably impact margins over the long-term and build brand loyalty.

In addition, the membership will enable iRobot to collect data with greater certainty which will further enhance the machine vision algorithms. Colin Angle recently said that iRobot’s fleet of machine learning platforms is second only to Tesla. Capabilities currently developed include “clean zones” and “keep out zones.” If the robot keeps on getting stuck on a tangle of cables under your TV stand for example, it’ll suggest to users to mark this as a keep out zone to avoid in future. As with clean zones, these areas can be customized in the app. If you want your Roomba to do a quick vacuum when you leave the house, you can connect the app to an August smart lock or a location service like Life360. When you walk out the front door, it’ll know to start cleaning. Other features include customizable pre-set cleaning routines, recommended cleaning schedules based on users’ usage, and seasonal cleaning schedules, such as more frequent vacuuming when a pet is shedding or during allergy season.

Investment Strategy

iRobot operates in the household robotics industry which is one of the most exciting industries to watch over the next decade. With an expected CAGR of 20% over the next five years alone, iRobot could easily double its current valuation if it maintains its current market share. 

With that being said, there are some legitimate question marks around the competitive advantage that iRobot possesses especially from an intellectual property perspective. Unless iRobot is able to build and maintain brand loyalty, low cost competitors offer a real threat to the success of iRobot.

Ultimately, iRobot and its technology has come a long way since the launch of its first household robot almost 20 years ago. In the beginning people were skeptical that robots could effectively clean their home, however now people are being impatient that robots can’t do more. In a market where valuations constantly appear stretched, iRobot presents a distinct value proposition to both investors and customers alike.

At the time of writing, the author has held a long position in iRobot since July 2020.


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Wolf of Harcourt Street

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Disclaimer: I am not a financial adviser and I am not here to give specific financial advice. The opinions expressed are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The information is based on personal opinion and experience, it should not be considered professional financial investment advice. There is no substitute for doing your own due diligence and building your own conviction when it comes to investing.