Seeking Alpha
Profile| Send Message| ()  

The iRobot Corporation (IRBT) is a U.S.-based firm that focuses on Robotic Solutions for Consumer (Home Robots) and Defense and Security segments. Currently, the company represents a rare pure-play investment opportunity within Robotics. iRobot shares closed at $38.00, as of June 21, 2013. The 52-week low-high price range is $16.25-$38.89. Although IRBT has more than doubled in value since December 2012, the stock is well-positioned for further sustainable advance. My 12-month price target is $50 per share.

Based on qualitative factors, IRBT represents a lucrative investment thesis. First, IRBT has developed extensive lineup of domestic cleaning appliances, and the company is actively pursuing expansion opportunities into the areas of healthcare and remote presence. Second, as one of the first-movers within Robotics, IRBT benefits from close R&D partnership ties with the U.S. government. Third, considering the novelty of Robotics (growth phase of the "S-curve"), IRBT has the ability to increase operating margins while growing revenues at the same time. Fourth, considering the small-cap size and leadership position within Robotics, IRBT represents a high-potential acquisition target. Finally, the current virtually all-equity capital structure with strong cash position provides ample liquidity buffers and R&D capabilities during the unlikely events of market dislocation.

Based on quantitative factors, IRBT's EV multiples, normalized for significant cash holdings, are attractive compared to those of the sampled high-growth technology-focused companies.

SWOT Analysis

Strengths

  • Capital Structure

IRBT has significant cash reserves of $137 million (including short-term investments) and virtually no debt outstanding.

  • Extensive Product Line

IRBT has a diversified and expanding product lineup that constantly benefits from cross-market and cross-product R&D. The recent announcements, related to the AVA Remote Presence and RP-VITA Telemedicine Robotics, lead to further strengthening in product portfolio.

  • Technological Leadership

IRBT holds leadership positions within Robotics hardware and software development. The firm leverages its extensive expertise and patent portfolio to develop innovative solutions, such as the AWARE Robot Intelligence Systems. Currently, the company retains 192 U.S. patents with the scheduled expiration date in 2019.

  • Strategic Alliances

The scale of IRBT's operations provides for strategic partnerships with other specialized firms, helping IRBT gain presence in the emerging niches of Consumer Robotics. For instance, the recent partnership with InTouch Health fostered the creation of RP-VITA Remote Presence technology.

  • Favorable Product Distribution Trends

Non-U.S. customer contribution increased to 57% in 2012, and 59.6% in Q1 2013, compared to 42.1% in fiscal year 2010. The Consumer segment's contribution increased to 84.9% in 2012 compared to 61.6% in 2010 fiscal year. The single customer (The Boeing Company) dependence fell to 4.5% of total revenues in 2012 compared to 17.4% in 2010.

  • Retention of Customer Data

IRBT has the ability to retain information on existing customers, which may contribute to secondary sales of spare parts and improve marketing efficiency.

  • R&D Partnership with Government

IRBT is a beneficiary of multiple government-funded R&D projects. This ongoing partnership may lead to further innovations within the Consumer Robotics segment.

  • Improving Gross Margins

The IRBT's continuing focus on quality and manufacturing processes decreased the amount of scrap details and contributed to the 4.30% improvement in gross margins in 2012. Considering that IRBT's product mix is shifting toward the higher-yielding Consumer segment (Consumer segment's gross margin is 49% vs. Defense and Security segment's 35% based on 2011 data) and higher-priced Roomba 600 and 700 robots, the gross margin improvement is likely to be sustainable.

  • Ample Liquidity

IRBT benefits from ample liquidity in the form of short-term borrowings and fully available $75 million credit facility with the Bank of America.

  • M&A Target

Benefiting from extensive patent portfolio and relatively small capitalization, IRBT may represent an attractive strategic acquisition target for some of the major Internet and Consumer Electronics industry players.

Weaknesses

  • M&A-Fueled Expansion

The recent acquisition of Evolution Robotics dilutes cash and equity reserves. Although strategic benefits are available through synergies, the continuing M&A-fueled expansion strategy may dilute shareholders' equity.

  • High Product Pricing

The entry price point for Consumer Robotics is in the $349-$699 range, and the company's products may not be affordable to low- to mid-income consumers. Therefore, the 40%-plus gross margins may decline over the long run.

  • Increasing Selling and Marketing Expenditures

IRBT has recently mentioned the success of its expanded U.S.-focused advertising campaign. As the product mix is shifting toward the Consumer segment, IRBT will likely sustain higher selling and marketing costs. The 2012 fiscal-year results reflect the following selling and marketing costs increase: 16.4% in 2012 vs. 12.6% in 2011, as percent of outstanding revenues.

Opportunities

  • Remote Presence

The Remote Presence opportunities are reflected through the recent introduction and continuing adoption of the RP-VITA product line for hospitals. The remote presence market size opportunity estimate, per IRBT's sources, is around $13 billion. Colin Angle, the CEO of IRBT, talked extensively about the remote presence opportunities during the Q4 2012 earnings results conference call. The recent announcement of Ava 500 robots, in collaboration with Cisco, adds to Remote Presence opportunities' optimism.

  • Product Lineup Expansion

IRBT can significantly expand its consumer product lineup via leveraging common platforms and software. Furthermore, IRBT is actively pursuing functional diversity of its consumer products and continues to maintain R&D at 13%-15%, as a percent of outstanding revenues.

  • Defense and Security Segment

IRBT's deep product expertise within the Defense and Security segment may aid the company acquire additional contracts with the U.S. government. The recently announced $30 million contract with the U.S. Army reflects the top-line upside opportunities for IRBT.

  • Increasing Unit Sales

The Consumer segment's revenues growth was 28.1% in 2012, based on 7.2% ASP increase and 18.2% growth in unit shipments. In Q1 2013, IRBT increased Home Robot unit shipments by the still healthy 7.4%. The continuing robust unit sales growth is favorable to IRBT.

  • Increasing Average Selling Price (ASP) and Margins

IRBT is consistently moving up-market with the newly developed products. The resulting margin expansion will lead to the bottom-line growth. For instance, Roomba 600 and 700 home robots contributed to the 4.4% operating margin growth in Q1 2013 compared to Q1 2012.

Threats

  • Government's Austerity

The Defense and Security segment's revenues declined by $107.5 million (or 57.5%) in 2012. The further decline in Defense and Security segment's revenues contribution is expected due to the government's austerity policies.

  • Intensifying Competition

The Robotics industry is subject to rapidly changing product and technology trends. Although IRBT is well positioned within the current competitive landscape, established players in other fields (i.e., Consumer Electronics) and emerging companies in Robotics may out-innovate IRBT.

  • Outsourced Manufacturing

IRBT manufactures Consumer Robotics products in six different plants in China. Considering the uncertain legal environment outside the U.S. (and relative to the U.S.), manufacturing outsourcing may lead to intellectual property leaks hurting IRBT's competitive edge.

  • Concentration of Contract Manufacturers

IRBT depends on several single-source contractors for manufacturing of certain Robotics products. Therefore, IRBT is subject to limited supplier-side bargaining power and manufacturing discontinuation risks.

  • Personnel Retention

Considering the scarce supply of qualified personnel within the Robotics industry, retention of key employees is critical to IRBT's ongoing success.

Quantitative Analysis

IRBT is attractive based on EV multiples values and compared to the peer group of high-growth technology stocks. I selected comparable companies based on the following characteristics: extensive operational scale, leadership position within their respective fields, and expected robust EPS growth rate.

Exhibit 1

($ in millions)

IRBT

MEDIAN

(DDD)

(AMZN)

(TSLA)

(LNKD)

(NFLX)

EV / EBITDA

18.5

72.6

47.4

39.4

N/A

119

97.8

EV / Revenues

2.1

11.3

11.3

2.0

13.1

17.3

3.4

Revenues Growth % (yoy)

8.6

26.45

31.0

21.9

N/A

72.3

17.7

Earnings Growth % (yoy)

N/A

N/A

-4.9

-36.9

N/A

353.3

N/A

EV/Revenues/Rev. Growth

24.4%

42.7%

(TTM 12 months; Extreme Values = N/A; Source: Yahoo Finance and Gurufocus.com)

The IRBT's EV/EBITDA and EV/Revenues compare favorably to the median of the sampled companies. Although IRBT's revenue growth rate is significantly lower compared to that of the median of the sampled companies, the ratio (EV/Revenues/Growth Rate*100) is still favorable on relative basis. If we were to back out the share price target solely according to EV/Revenues/Revenues Growth Rate, assuming everything else constant on relative basis, the IRBT price target would be at $62-$63 per share.

There are many other non-systematic factors present in IRBT and its peer group that may include liquidity, expectations, and management. A more thorough comparables analysis and rigorous DCF may be warranted for the final investment decision. However, based on aforementioned qualitative SWOT and quantitative EV-ratio analyses, IRBT looks like a solid buy at this time.

Source: iRobot Is Still Undervalued And Attractive - Buy Recommendation