iRobot Is Strengthening Its Position

Summary

• iRobot recently reported better-than-expected Q4 earnings.
• The company continues to differentiate itself through a growing focus on software.
• While iRobot is well-positioned in the long term, the company's lack of product diversification adds a great deal of risk to the company.

iRobot (NASDAQ:IRBT) jumped ~14% after reporting stellar Q4 results. The company handily beat both GAAP EPS and revenue expectation at $0.46 and $544.83 million, respectively. iRobot is well-positioned to continue its growth in the coming years even as competition heats up. While iRobot has come back down over the past few weeks, the company's prospects remain strong.

iRobot saw its share spike after posting impressive quarterly numbers.

Data by YCharts

Competitive Differentiation

The consumer robotics market has grown at a rapid rate in recent years, which has in turn attracted more competitors. Despite the influx in competition, iRobot continues to maintain its leadership position within the industry. By focusing heavily on software and consumer engagement, iRobot is managing to differentiate itself in an increasingly crowded field.

iRobot has started to put a greater emphasis on software, investing more heavily into areas such as machine vision and AI. By making its products far more capable on the software front, iRobot should be able to more smoothly integrate and tailor these products into customers' differing environments. iRobot recently introduced the iRobot Genius Home Intelligence platform, which gives customers greater ability to customize their products.

Investing more heavily into software should also give iRobot a more sustainable edge over competitors like Samsung (OTCPK:SSNLF) or SharkNinja. iRobot should also experience greater profitability in the long term as the company shifts more towards the higher-margin software business. Software will likely become an increasingly important aspect of iRobot's business with the rapid progress being made in areas such as machine learning and general AI.

iRobot's focus on software could give the company a sustainable edge over competitors.

Source: iRobot

Strong Position Reflected in Q4

The company's strong Q4 reflects the market's demand for higher-quality consumer robotics. In fact, iRobot net quarterly sales of $544.83 million grew 28% YOY despite an increasingly crowded market, unfavorable trade conditions, and supply chain constraints. iRobot's increasing focus on software and customer relationships appears to be working.

Despite the headwinds facing iRobot, the company is well-positioned to take even more market share moving forward. iRobot is one of the few large consumer robotic pure plays and appears to be pulling even further ahead in this space. Whereas companies like Samsung are only diverting a fraction of their attention on consumer robotics, iRobot is solely focused on this growing market.

Risks

iRobot's relatively undiversified product offering should worry investors to some degree. The Roomba accounted for ~89% of iRobot's Q4 revenues, which means that iRobot's current fortunes are largely tied to the success of its robotic vacuum line. iRobot's overreliance on its Roomba line clearly adds a greater element of risk and volatility to the company.

While iRobot's Braava line has shown strong growth potential, it still accounts for a relatively small portion of the company's revenue. iRobot also indefinitely delayed its Terra lawnmower, which further raises concerns over the company's lack of product diversification. While the Roomba is currently enjoying strong sales, this could easily change with shifting consumer demand or competition from other robotic vacuum lines.

iRobot has a relatively undiversified product line, with the vast majority of its revenues coming from the Roomba

Source: iRobot

iRobot is also facing a reinstated 25% tariff on China-imported Roombas, which is expected to add over $40 million in full-year incremental costs. If US-China trade relations continue to sour, iRobot will be put under even more pressure. In response to these trade restrictions, iRobot has started shifting its supply chain away from China to areas like Malaysia. However, this will still translate into higher overall costs in the long term.

Conclusion

Despite numerous headwinds facing iRobot, the company is still well-positioned to take an outsized share of the consumer robotics market over the long term. While iRobot has a relatively high forward PE ratio of 39 at its current valuation of $3.5 billion, the company's long-term prospects more than justify this. iRobot is a solid investment in the burgeoning consumer robotics space.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Comments

[Clay King]

As an owner of two of IRobot products I am hard pressed to buy the stock. The company seems to not wish to communicate with its users, but almost force the user to come to it. There are no communications to users regarding updates, which often cause problems rather than solve them. Then a call to service will find the same old tired responses of yadda yadda yadda. Never their fault. The products are overpriced compared to lots of competition but in some cases cost a bit more due to better software, when working, but expect that is very close to being caught. With present cost, if and when this iRobot needs replacing, a different company will likely fill that void. Now lest one think I am a complainer let it be known that for the first nine months of ownership I was most happy. Only took one update to destroy a $1,000 machine to one costing $200. They don’t seem to care. Emails go unanswered, and phone calls users need a lesson in foreign accents. If their solution does not work for the problem, they just say, sorry, can’t fix. I do not want to invest in this. Robotic investments......go elsewhere.

[D. Rider]

I urge everyone to stare at the picture in this Ars Technia link/article:

arstechnica.com/...

Then, think about what the future could be for IRBT. Sure, they could get smacked and waylaid by competitor (AMZN included), but they also could turn into something that we all cannot possibly imagine right now. Jeff Bezos kids gave the perfect example of what's coming. It's not if but a question of who gets there first. Established players don't mean anything. I've learned this lesson in tech long ago since investing in MSFT in '89 and '90. Look at that picture closely, and then consider what IRBT has been focusing on the past year and a half.

(Disclosure: I am long IRBT since 2013, 2017 and nearly tripled that overall position during last march's markets smackdown).

The best of fortune to us all

[Rizzi Capital]

Too many Roomba clones selling at half the price or less. The Asian competitors steal whatever intellectual property iRobot develops, so their cost basis is much lower. By producing in Asia, iRobot basically gift wraps all this IP and hands it right over to the competition.

Going forward the market is huge, but competitors will absolutely gut it. I don't see the stickiness of this product. Perhaps in the USA it has some advantage, but the worldwide market will be dominated by cheap clones, and that will be impossible to reverse.

And unlike the phone market where chips and screens are costly for everybody, and actually cheaper for the big boys because of economies of scale, with these robo vacuums, everybody is basically on the same level, because 90% of the machine is basic plastic and metal components. And since you can't really benchmark a vacuum, you can't say if the actual tech in a more expensive roomba is really faster or more efficient than the less cutting edge clone.

[Max1123456]

@Rizzi Capital another clueless short

[manda_dero]

I've been following iRobot for a few months now because of their strong fundamentals and management team. I think it would be worth mentioning in the article the spike in their price was most likely due in some degree to the short squeeze players this past month as iRobot was on the list of 'over shorted companies' at one point. Even though I own a few iRobots I don't know if I will take a position on them as I fear the competition will continue to meet their capabilities at a cheaper price. I do think as you've mentioned they need to diversify with other home robotic devices...Thanks for the article.

[Rengade]

What about the rising competition of Xiaomi-backed Roborock? The products are cheaper and AI-wise at least on the same level (if not superior). And getting more and more popular...

[steventam21]

Still incredibly overvalued for me, just like the rest of the tech sector.