Why I'm Buying iRobot (IRBT)

I recently went long on 3,000 shares of iRobot Corporation (IRBT) at a blended price of about $22.08. This is a company that I’ve tracked since its IPO last November and I feel good about getting in at the current valuations. This company is trading at a little over 2x 2006 revenues, and should be profitable later this year.

On May 2, I reviewed some of the company's fundies. In that post, I was considerably more down on the company. This is what I had to say then:

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I believe that IRBT has struggled mightily as a public company. I bought 500 shares when the company was trading around $32 right before Christmas. Part of my investment decision was based on my personal shopping frustration of actually finding one of their damn robotic vacuum cleaners as a gift for Christmas. I think a lot of people had the same idea, as their stock ran up nicely during the end of 2005.

However, the company really disappointed the Street with their Feb 2006 earnings announcement and the stock got hammered. I was fortunately able to get out losing only about $1,000, as the stock has since tanked and is trading near $23 right now.

Motley Fool has been pumping this stock for the last 5 months. I’m not such a big fan of Motley Fool, as I think they lead retail investors down the wrong road through water-downed analysis and gimmicky stories. You’ll be hard-pressed to find Motley Fool talk about the real risks associated with an investment. However, the Fools got it right when they stuck Irobot in their “Rule Breaker” portfolio, as this company has some serious intellectual property assets in a field that matters - Robotics.

IRobot has three general product lines:

Roomba Family - these are the cute disc-shaped vacuum cleaners that essentially sold out during Christmas. Irobot has offered Roomba at price points ranging from $150 for the lower end, basic Roomba Red model to $300 for the feature-packed high end Discovery model that returns to its charger automatically and recharges the battery

Packbot Family - These are the family of military robots. Products comprise mostly of bomb-disarming robots, autonomous recon units, and some munitions detection robots.

Scooba - the newly released “mop” replacement that scrubs floors. The company initially priced this at $400.

The company has a strong portfolio of IP around its navigation technology. Navigation and environmental awareness is tough shit to do when it comes to robotics; the other stuff on a robot is just mechanics. What’s really wicked is that Irobot uses this navigation platform for both its military and consumer products.

Irobot typically gets research dollars from Uncle Sam to develop some top-secret military grade stuff, which they get to keep the rights to, then the company waters that technology down and sells it to consumers in the form of intelligent household robotics. Brilliant.

On top of that, Irobot announced a $26 million military contract March 27 which basically fulfills much of their military revenue target for all of 2006. It’s pretty incredible to book all of your revenue for a product line in the first quarter of the year. Irobot did this. Any other announcements for the rest of this year is pretty much all upside.

So what’s the problem? It’s twofold.

1. This company is still run by the founders. This is very rare in a company. The founders are brilliant technical people having received several degrees from MIT, but have recently shown that they are not scaling well to efficiently run a public company. It takes one set of skills to build some rocket science robots, but another set of skills to manage a diverse and and growing line of complex products.

2. Their Scooba product launch in Q1 06 was an abysmal failure. Retailers such as the Sharper Image have dramatically dropped the list price from a MSRP of $400 to $250.

I think that the Scooba product failure and management screwups have been largely priced into the stock. IRobot is trading at a pretty cheap price IMHO. Yahoo! reports an enterprise value of $465m and trailing 12 month revenues of $142m. That means this company is trading at only 3.3x trailing revenues… a pretty good deal for a company that is clearly dominant in their industry (albeit a small one) and growing at about 35% YoY. Their EBITDA and P/E multiples aren’t so great, but that’s normal for a young, growing company that is still not at scale yet.

The other big risk is that the lockup period for the venture investors ends on May 8. There’s about 30% (7 million shares) of the shares outstanding that are held by venture investors, who I think are looking for liquidity (note, I do not have any inside information here as I would never ask my contacts at Trident about this).

With all these mixed signals, I’m going to watch the charts closely and wait for a bottoming out of the prices before I get in. It’s never a good idea to try catching a falling sword and I will not attempt to do so here. However, Irobot is just too wicked of a company to stay away from. I love their products and I always invest in companies where I think the products kick ass. I think the company has a good chance of meeting their Q1 numbers, which will be announced after the market closes today. If not, the company should consider making some robots to replace their management…

IRBT 1-yr chart: