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SharkNinja Just Launched Its Robotic Vacuum Series Yesterday, We Reiterate Our Strong Sell Opinion And 20%-50% Downside Risk

|About: iRobot Corporation (IRBT)

Summary

Back in June we warned that Shark Ninja, the dominant leader in the US vacuum market was planning to enter the robotic vacuum space

Yesterday, Shark debuted its offering on its website. The price point, features and distribution strategy pose a serious challenge to iRobot

We continue to see 20-50% downside risk in IRBT shares once it becomes clear its margins and market share are being eroded

Spruce Point Capital Management wants to alert our readers about a critical update to our research on iRobot (Nasdaq: IRBT). Our latest view points can be found on our website and regular updates will be posted on Twitter.

If you recall, back in June we warned that SharkNinja was planning to enter the robotic vacuum market. SharkNinja has become the leader in the US vacuum market by out-innovating competitors such as Dyson. The story is told nicely in a Forbes article entitled "How Shark Ate Dyson's Lunch In America".

There is no longer speculation about Shark and its intentions. The Company formally entered the market this week and a preview of its products are available on its website.

Based on our preliminary review, we believe Shark's ion robot series poses an even worse threat than we initially expected:

Shark's entry into the market is earlier than we expected and gives the Company enough time to compete for shelf space for the critical Q4 holiday season
Shark is entering the market with three similar looking robotic vacumm models at different price points. The model numbers are similar to iRobot's which is cleverly designed to make consumers think critically about the purchasing decision
We believe Shark is offering the same features and better value than the higher end Roomba at a fraction of the cost. The 750 Connected vacuum is offered at $349.99 with free shipping
Shark is targeting the same distribution outlets including Amazon where it will soon be available. Other mass market retailers such as WalMart, Target, Home Depot and Lowes will also sell the product
We believe that Shark entered this market because it can be at least #1 or #2 in the category. Given the US market size of approximately $440m, and assuming Shark captures 6% - 10% share, we believe $26m - $44m of iRobot's sales are at severe risk of being lost
The greater concern is that margin pressure is an inescapable problem that iRobot can no longer avoid. If Shark is successful in communicating to investors that its product has better performance with all the same features at a lower price point, iRobot will undoubtedly lose share and be forced to cut prices further resulting in significant earnings disappointment

We warned that iRobot's distributor acquisitions were defensive, now we have validation:

iRobot acquired its European distributor for a price significantly higher than its Japanese acquisition for no obvious reason. Our August 18th reportprovided irrefutable evidence to suggest financial anomalies from the margins implied from iRobot’s guidance
With prices falling across the entire category, and margins certain to be under pressure, it makes no sense how iRobot claims to receive 45% margins in Europe and 20% in Japan
iRobot has remained silent on the matter. What are they hiding?
The only action we’ve seen is iRobot’s Director sell a meaningful % of this stock – 10,000 shares at $92.71 (form 4)

Why There Is Still 20% - 50% Downside Risk

iRobot currently trades at 3x revenues and 64x P/E based on 2017E results. Not a single sell-side broker has a buy recommendation on the stock
At its current share price iRobot is trading 13% above the average analyst price target. We have yet to see a single analyst comment on the Shark entry and the risks to iRobot's earnings
Disappointment of earnings looms large, yet iRobot is trading at peak multiples and well in excess of any technology hardware company. Its multiple needs to contract to reflect the real risk of margin and share loss. At 1.5x to 2.5x sales and 20x to 33x P/E on our estimates, it's easy to see 20% to 50% downside risk potential

About Spruce Point Capital Management

Spruce Point Capital Management, LLC is a New York based investment manager founded in 2009. The firm focuses on short-selling and special situations opportunities. The firm conducts in depth forensic fundamental research and takes an activist approach to investing. Our research challenges conventional thinking with deep fundamental analysis, analytical rigor, and conclusions rooted with our unique viewpoints. For more information visit our website, and follow us on Twitter @Sprucepointcap

Disclaimer

This research expresses our investment opinions, which we have based upon interpretation of certain facts and observations, all of which are based upon publicly available information, and all of which are set out in our complete research presentation report on our website. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained herein may include forward looking statements, expectations, pro forma analyses, estimates, and projections. You should assume these types of statements, expectations, pro forma analyses, estimates, and projections may turn out to be incorrect for reasons beyond Spruce Point Capital Management LLC’s control. This is not investment or accounting advice nor should it be construed as such. Use of Spruce Point Capital Management LLC’s research is at your own risk. Any historical performance achieved from any idea or opinion from Spruce Point Capital Management should not be considered an indicator of future performance. You should do your own research and due diligence before making any investment decision with respect to any of the securities covered herein. Spruce Point Capital Management, subscribers and/or consultants shall have no obligation to inform any investor or viewer of this report about their historical, current, and future trading activities

You should assume that as of the publication date of any presentation, report or letter, Spruce Point Capital Management LLC (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our subscribers and clients has a short position in all stocks (and are long/short combinations of puts and call options of the stock) covered herein, including without limitation iRobot Corporation ("IRBT" or "the Company"), and therefore stand to realize significant gains in the event that the price of its stock declines. Following publication of any presentation, report or letter, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation.

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To the best of our ability and belief, as of the date hereof, all information contained herein is accurate and reliable and does not omit to state material facts necessary to make the statements herein not misleading, and all information has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer, or to any other person or entity that was breached by the transmission of information to Spruce Point Capital Management LLC. However, Spruce Point Capital Management LLC recognizes that there may be non-public information in the possession of iRobot or other insiders of iRobot that has not been publicly disclosed by iRobot. Therefore, such information contained herein is presented “as is,” without warranty of any kind – whether express or implied. Spruce Point Capital Management LLC makes no other representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All rights reserved. This document may not be reproduced or disseminated in whole or in part without the prior written consent of Spruce Point Capital Management LLC.

Disclosure: I am/we are short IRBT.