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Summary

  • iRobot has the potential to change the way the entire world functions.
  • New products, innovation, and more could potentially lead to capital appreciation.
  • Technology and robotics seem to be the industry of the future.

Executive Summary

iRobot (NASDAQ:IRBT) is a company founded in Massachusetts that focuses on the development of some of the most widely used robots in the world. The company was founded in 1990 by Rodney Brooks, Colin Angle and Helen Greiner while working at the Massachusetts of Institute of Technology Artificial Intelligence Lab. iRobot primarily sells robots that have revolutionized how cleaning at home works. iRobot has sold over 10 million robots worldwide, with its best seller being the iRobot Roomba which can vacuum floors on its own. iRobot has also sent more than 5,000 defense and security robots to researchers, military and civil defense forces worldwide that have performed dangerous search missions, reconnaissance and bomb disposal missions, and more.

Why iRobot Is Doing Well

iRobot has seen some growth recently in the home cleaning segment of its business. The military has seen budget cuts that have reduced the amount of spending allocated towards iRobot devices which led the company to restructure and focus on its "bread and butter" home products. Home robot products have grown by 30% in 2013 and sales continue to do well.

The future of technology appears to be moving towards robotics and iRobot may be at the front of the next big industry. No other robot brand has the brand recognition of iRobot, which gives it a competitive advantage. Elon Musk was recently on CNBC discussing robots, artificial intelligence and where he sees things going in the future. Although Musk was discussing that artificial intelligence has the potential to have negative consequences, he also recognized that the future of technology is going in that direction and mentioned he has invested in artificial intelligence technology.

Additionally, the housing market continues to improve in the majority of the country and will likely continue to do well over the long term. Although the millennial generation are known for living with their parents, at some point they will have to move out and become either renters or homeowners. This could potentially lead to an increase in iRobot sales, as the younger demographic is more likely to try an automated home cleaning system. iRobot offers machines that can vacuum, mop floors, clean pools, clean gutters, and more. It seems likely that many younger people would much rather spend money to have these home chores done automatically than do them themselves.

Potential new products are the largest wild card at iRobot. Although the current products offer growth potential, new products could be the catalyst that propels iRobot into unforeseen growth. The New York Times recently posted an article discussing the future of robots and how they will be changing the way things get done in the future. There is so much potential where iRobot can expand that the opportunities are potentially endless. In reality, it would likely only take one large game changer product to see exponential growth in the stock.

Potential Downsides

Although the future may be bright, iRobot is not a fool proof stock. The valuation can be tricky to analyze for some investors. iRobot currently trades at a price to earnings multiple of 46.3, which is considerably higher than the industry average of 15.1 and the S&P 500 average of 18.3. The price to earnings in relation to their growth (PEG Ratio), however, is only 1.5, which shows that iRobot is relatively fairly valued. It is important to note, however, that iRobot doesn't pay a dividend, despite the fact the industry average is around 1.9%. This may be of less importance to many investors as iRobot is a stock you invest in for capital appreciation.

As you can see below, iRobot has actually underperformed the S&P 500 over the long term. Usually this is the sign of a stock worth avoiding, but this may not be telling the whole story.

(click to enlarge)

Charts Courtesy of Morningstar

Looking at a more recent short term chart you can see that iRobot has actually outperformed the S&P 500 index in recent years. This is likely at least partially due to its restructuring and its focus on home consumer products rather than military products. iRobot's new innovative product releases have also had a positive effect on the stock price.

Time To Pull The Trigger?

Pulling the trigger on iRobot may be worth doing depending on what type of investor you are. iRobot certainly has a lot of potential considering its innovation and the trends towards a more robotic economy and lifestyle. Industry growth is expected to do well over the long term, which would certainly benefit iRobot. There are two major wild cards that could potentially cause iRobot shareholders to do very well. The first is the opportunity for new products and innovation that could lead to a "game changer" product. The best example of something similar would be when Apple (NASDAQ:AAPL) introduced the iPhone. The other major potential catalyst would be a potential buyout. Companies like Apple and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) are buying out home technology and automation companies relatively often, as they are both looking to make a play in this space. Google is also working on automated vehicles, so a robot company for Google wouldn't seem out of the ordinary. The main thing to keep in mind with iRobot is that both of the two main catalysts are speculative. For investors looking for a speculative play and are willing to bet on potential buyouts, new products, or continued growth in the current product lineup, iRobot may be a worthy investment. For risk adverse investors, it may be worth looking elsewhere.

Disclosure: The author is long AAPL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Will iRobot Be The Company That Changes The World?