iRobot: Consumer Robotics At Its Best

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About: iRobot Corporation (IRBT)
by: The Fundamental Investor
Summary

The consumer robotics segment should have explosive growth in the next five years due to a number of factors.

This year iRobot will launch its robotic lawnmower with advance capabilities. several new versions of existing products will also be rolled out.

The product suite is excellent and provides huge cash and time savings.

iRobot already has a significant share in the market. If guidance is achieved market share will expand.

A number of competitors are out there but iRobot maintains an exclusive focus on consumer robotics.

A Growth Landscape

The automated home-care industry is going through an evolutionary stage. As prices of consumer robotics decline, average incomes continue to grow, and population aging becomes a major factor, the industry will have a major share in the overall robotics industry. Right now the consumer robotics industry is estimated to be a $5.5 billion industry and is expected to have explosive growth in the next five years. iRobot has placed itself as the major player in this lucrative industry. With its hot products in a fast-growing market, the company should fit well in a growth portfolio. But the price has shot up very fast recently, so I recommend a Hold on the stock for now, with potential to increase your positions should you see any dips. iRobot expects 2019 revenue of between $1.28 billion and $1.31 billion ( yoy growth of 17% to 20%), operating income of $108 to $118 million, and EPS of $3 to $3.25 excluding discrete items.

Data from Consumer Robot Market - Industry Trends, Opportunities and Forecasts to 2023

An Excellent Product Portfolio

iRobot has multiple products under three segments: robot vacuums, robot mops, and pool cleaners. The robot vacuum suite has products with prices ranging from $299 to $1,099. The prices vary depending on features like the number of stages in the cleaning system, the brushing technique, suction power, visual navigation, scheduled cleans, and automatic disposal option. The pricing is very effective, in my opinion, because the customer is not disadvantaged on the most important feature, which is getting the floors clean, while the price slope is not so steep that customers are discouraged from buy the premium products.

Solution Economics

According to Payscale, the average hourly pay for a floor cleaner ranges from $8.65 to $19.84, which implies a median of $11.25. Even if an establishment requires just one hour of service every day, that is over $4,100 a year, of course. That is an extremely conservative estimate. The reason for illustrating this is to show the huge potential savings, and the value added by Irobot’s robot vacuums and robot moppers. The value add and potential savings do not end in floors.

Image from Payscale

If you have tried to clean your pool, you know it is a very difficult job. Chances are high that you hire other people to do it for you, which is expensive. Costowl’s estimates show that it would cost between $75/hour and $100/hour to hire someone to clean your dirty pool. It typically takes 2-3 hours to clean a pool, which makes the onetime cost in between $150 to $300. In case of extremely dirty pools, it could require drain and clean service that can bring the bill up to $500 -$600 or more. But, If you purchase Irobot’s Mirra pool cleaner at $999.99, you would only have to do some physical activities (like placing it correctly a cross your pool; it can't climb) while the robot will take care of the rest. That points to really good value.

Image from Irobot’s official website

Financials

Irobot’s revenue went up at a compound annual growth rate of more than 17% from 2013. That is a clear sign of its dominance in the home-care robotics market. As of its most recent year’s revenue, the firm has a market share of more than 20% in the overall consumer robotics market.

Data from Stockrow

For 2020 iRobot is targeting revenue growth of mid to high teams, a three-year CAGR of roughly 19%, a gross margin of approximately 48% and operating margins increasing to 10%. Now, given iRobot’s substantial moat as the first mover, and assuming that its guided growth proportionally increases its market share, the firm should have over 26% market share in the consumer robotics market by 2023, implying revenue of $3.82 billion. You may call it optimistic assumption but please be informed that iRobot is not only getting traction in the U.S., but also internationally. 2018’s highlights indicate that the firm’s sales in the U.S., EMEA, and Japan grew 24%, 29% and 25%, respectively, year-over-year.

Consumer robotics market forecast from Consumer Robot Market

The reason behind iRobot’s slightly volatile margins is simple; it is going through a growth phase, but I am confident that it can improve its profit margin towards 10% within the next two years. But don’t forget its solid performance in the top line; sales are growing fast, and profitability should naturally increase with revenue and market share increases, as the firm realizes greater economies of scale.

Data from Stockrow

Innovation at core

This year iRobot expects to launch its revolutionary robotic lawnmower, Terra. Terra uses imprint mapping technology to learn the environment which helps it to navigate the yard intelligently and cut in systematic rows. The memory system enables it to remember where it has cut and where it needs to mow. During battery downturns, Terra will return to base to recharge and move by itself after it is fully charged. Remember when I was showing you the potential cost savings and value added? Terra will be no different in that aspect - do your math. New features in Terra will include improved wireless communication systems and standalone beacons. By placing the beacons on their yards, users will be able to move Terra across the perimeter. Scheduled maintenance will also be possible.

The robot will use the firm’s iRobot home app to give the users complete control. Earlier in the Q3 iRobots launched two new products, the Roomba e5 which is its core product, offering premium features at a lower price, and its game-changing premium Roomba i7 and i7+ robots. Both of these contributed to the 24% year-over-year 2018 domestic revenue growth. The firm is committed to expanding its international sales. The advantages are straightforward in geographic diversification; revenue and market share goes up while risk is better managed as it makes the firm less susceptible to adverse macroeconomic impacts in any one country. The recent year’s 23% growth from international sales was driven by Roomba 900, iRobot’s premium robot, and this strong demand bodes well for its 2019 global rollout for i7 and i7+.

Competition and Risk factors

A significant portion of the vacuum cleaning market is still populated by traditional manufacturers, non-robo based cleaners that we regularly see. iRobot’s largest competitors include Samsung, Neato, LG, Dyson, Sharpe, and Panasonic. Most of these firms have sales reach across the globe and are formidable competitors, but none of these competitors have an exclusive focus on Robotic vacuum cleaners. On the other hand, iRobot maintains an exclusive focus on home-care robotics and has a major share in the industry.

What could happen if these competitors give iRobot a run for their money? What occurs under a scenario where iRobot’s revenue declines while profit margin remains the same at the long term average level (6.85%)?

As you can see, in case of a 20% decline in revenue (and assuming profit margin remains at the long term average level), EPS would drop to $2.16 per share. The assumption of having a constant profit margin even when revenue falls is not very realistic, but it gives a general estimate of the impact on EPS. Of course, EPS could substantially decrease in case of sales declines.

iRobot outsources its manufacturing to China and thus tariffs are an issue. The firm’s 10-K revealed that one of its contract manufactures plans to begin partial production outside of China beginning in 2019. In its earnings call the management said that the firm is actively addressing supply chain and manufacturing diversification initiatives. But manufacturing outside China will impact its cost structure and profitability. If prices increase, customers may not want to buy iRobot’s products and may consider cheaper alternatives.

“This initiative (supply chain and manufacturing diversification) is expected to negatively impact our gross margins in 2019 during the initial investment phase and in 2020 when we start production until we reach scale in the new facility as well as identifying lower cost component suppliers outside of China.”- Colin Angle - Chairman & CEO

Conclusion

iRobot is clearly the market leader in the home-care robotics segment. It has an all-star product portfolio with both national and global momentum. The firm is rapidly gaining market share and will launch major products this year. The market is aggressively pricing for growth and, as a result, the price has shot up. The suggestion to investors is to look for any dip in the price of IRBT.

Disclosure: I am/we are long IRBT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.