iRobot Stock is Pure Play for Smart Home Robotics
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If hardware is hard, then smart home robotics is nearly impossible. There are plenty of theories about why people have been slow to adopt robots into the home, aside from the obvious fear-driven Terminator narrative. The most obvious one is that the existing robots don’t do anything more efficiently or effectively than even a teenager – at least not at a price point that makes sense. The unstructured home environment and technological challenges also make it difficult to design a functional smart home robot capable of multiple tasks, like cooking dinner, washing dishes, and bagging rubbish. Most home robots today are mostly gimmicks, except maybe robotic companions for the elderly. That’s what led a co-founder of Apple to come up with “the coffee test,” one way to tell that humans have finally achieved artificial general intelligence.
A machine is required to enter an average American home and figure out how to make coffee: find the coffee machine, find the coffee, add water, find a mug, and brew the coffee by pushing the proper buttons.
Credit: Steve Wozniak
Robots may not be making coffee, but they’re doing the cleaning. Probably the only successful consumer robot today is the humble vacuum cleaner. The company behind the Roomba brand, which has become synonymous with robotic vacuum cleaners, is iRobot (IRBT).
Let’s talk about why the company’s stock has been on a tear over the last year, and whether it will ever find a home in the Nanalyze Disruptive Tech Portfolio.
Brief History of iRobot
Founded way back in 1990 by three MIT roboticists, the Boston area company had raised $30 million before going public on the NASDAQ in 2005. In the early days, it engaged in the sort of business typical of your fledgling robotics company – military contracts, including with the shadowy government agency known as DARPA. Some of these early robotic machines included Ariel, which detected and eliminated mines in surf zones, and the iRobot PackBot, a tactical mobile robot. By 2012, the company had delivered 5,000 security and defense robots. However, in 2016, iRobot sold off that segment of the business for $45 million to a private equity firm to focus on its consumer home robotics systems for the smart home market.
That part of the business has also evolved. The first Roomba launched back in 2002, followed a few years later by the Scooba, a floor-washing robot. A line of other home-cleaning robots came and went, such as Verro the pool-cleaning robot and Looj the gutter-cleaning robot. iRobotics even dabbled in robotic telepresence, spinning off a separate company called Ava Robotics in 2016. That startup, with about $2.3 million in funding, has also developed a disinfection robot model, joining a number of companies that pivoted into medical robots in the wake of the Rona. Just last year, iRobot suspended the launch of Terra, a robot mower, for the foreseeable future, as it continued to tweak its product lineup.
A Smart Home Robotics Stock
Today, the $3.1 billion company has a line of smart robotic vacuums and robotic maps sold under the Roomba and Braava brands, respectively. Business was pretty good in 2020, with $1.43 billion in total revenue, an increase of about 18% over $1.21 billion in 2019. Net income was even better, up nearly 60%, from $83.5 million last year to more than $147 million in 2020. However, a nearly $40 million chunk was thanks to the acquisition by telehealth company Teladoc (TDOC) of InTouch Health, which iRobot had an investment in. Investors have taken notice, with the stock returning nearly double the NASDAQ over the last year:
Its floor-cleaning robots use artificial intelligence and machine learning to navigate and do their dirty work, getting better over time at learning things like where Fido’s food bowl is located. Last year, iRobot introduced Genius Home Intelligence, a new platform for managing the company’s higher-end, Wi-Fi-connected smart home robots. The new software platform comes with a revamped app that allows users to personalize and control the robots more precisely, including determining when, where, and how their robots clean.
The company leverages Amazon Web Services for its cloud infrastructure, Home Knowledge Cloud, which collects performance data for product improvements and to integrate its robots with other smart home devices. Some of that data is also used by third parties to “deliver enhanced product features and customer value.” Wink, wink.
Investing in AI, Robotics, IoT with iRobot
As retail investors, we’re often shut out of opportunities to invest in private companies. Sometimes you can get creative, like the time someone suggested we could get a tiny bit of exposure to SpaceX by investing in the Baillie Gifford US Growth Trust (USA.L). While it’s a bit of a stretch to suggest that you can gain the same kind of exposure to emerging startups by investing in one individual company stock, iRobot does have an interesting portfolio of investments that’s worth noting.
It directly invests into private companies, as well as through its venture arm, iRobot Ventures. It looks like iRobot has at least $17 million locked up in about a dozen startups, mostly since 2017. Let’s briefly look at some of the more interesting ones:
- Boston-based Owl Labs, which has raised $22.3 million, for a high-tech conferencing device that combines a 360-degree camera, mic, and speaker. It’s yet another riff on the telepresence theme. iRobot participated in two funding rounds.
- Intuition Robotics out of Tel Aviv, Israel has raised $58 million, with iRobot participating in three rounds. We’ve written previously about the startup, which is developing digital companion agents that use AI to create empathetic relationships for elderly and incels.
- Another startup that iRobot funded on multiple rounds includes yet another Boston area company called Sense, which has raised $47 million for its platform that uses machine learning to track energy use.
- Computer vision is another technology where iRobot has made investments. It has participated in funding rounds for two San Francisco startups, Invisible AI and Synthesis AI. The former has raised $4.1 million to develop edge AI cameras for monitoring assembly lines. The latter has raised $4.5 million for technology that generates vast amounts of synthetic data for training computer vision models.
- Another company that we covered before is OSARO, also out of San Fran, has now raised $66.3 million to build out its deep reinforcement learning technology to make robots smarter.
Like any good investor, iRobot is mostly investing in what it knows – robotics, AI, and smart home technologies for the Internet of Things (IoT). These investments obviously represent technology developments that could benefit the company in the long term, especially as it tries to integrate its floor-cleaning robots into the smart home ecosystem.
Competition for Smart Floor Cleaners
Currently, iRobot claims to own about 62% of the global smart home robotics market (not including China) for intelligent floor cleaners. Market share shoots to about 75% in both North America and Japan. The company is dominant but not supreme. There’s a long list of contenders with robotic offerings, from consumer electronics and appliance companies such as Samsung, LG, Panasonic, and Hitachi to traditional floor cleaning brands including Dyson, Bissell, and Hoover to firms primarily focused on robotic cleaning such as ECOVACS, Roborock, Neato, and ILIFE. Here’s how the market shakes out, according to iRobot:
As potential investors, we want to know what companies might disrupt iRobot’s business down the road. Most of the names are familiar, except the last group. Three of the four startups are based in China, which is where iRobot contracts most of its manufacturing (though it’s also pushing into Malaysia). Briefly, let’s take a look at three of these upstarts that have a piece of the pie:
- ECOVACS has raised $20 million for its line of smart floor-cleaning robots called DEEBOTs, which like the Roomba uses AI and computer vision to recognize objects for avoidance. Its cheapest model is only $150 versus $275 for the Roomba 600. The company also has window-cleaning robots.
- Roborock has raised $28.4 million for its floor-cleaning robots, including a model that both mops and vacuums, using sonic technology that scrubs floors 3,000 times per minute.
- Neato Robotics is a California company that was actually acquired in 2017 by a German firm called Vorwerk that specializes in home appliances. The company had raised $48.6 million for its D-shaped smart robotic vacuums, which use LiDAR for navigation.
To Buy or Not To Buy
iRobot stands alone in the robotic vacuum world, but we can still try and value it using the simple valuation metric we’ve been introducing in recent articles (market cap / annualized revenues). For iRobot, we get 3.2 / 2.18 = 1.47. Remember, the smaller the number, the better the valuation, the lesser the expectation of future growth – roughly speaking. Here are some other companies we can compare this 1.47 number to:
- Palantir (41 / 1.28) = 32
- C3 (6.7 / .196) = 34
- iRhythm (2.65 / .315) = 8.4
- Medtronic (170 / 31) = 5.5
- Johnson & Johnson (427 / 90) = 4.7
- CrowdStrike (46 / 1.06) = 43.4
- Tesla (702 / 43) = 16.3
- Apple (2240 / 444) = 5
- iRobot (3.2 / 2.18) = 1.47
Typically, we want to compare companies in similar industries, but iRobot stands alone. So, we’ve just thrown up some other examples for you with Apple probably being the most relevant. iRobot has the lowest valuation ratio we’ve calculated yet for any company. That tells us expectations for future growth for this company are very low. That, or there’s a huge value play to be made here, but if we want value, we’ll look to our own dividend growth investing strategy.
Is iRobot stock an investment in consumer robotics or vacuums? You could argue it either way, but whatever it is, they’re clearly very successful at it. The company surpassed 35 million units sold in 2020, and is geographically diversified, with nearly half of its sales coming from outside of the United States. Another plus is that the company is working to build its direct-to-consumer sales channel, nearly doubling revenues in 2020 from the previous year. Cutting out the middleman means more moola for iRobot’s bottom line. The push to upsell its premium models is also a strategy that seems to be working.
Still, we have our concerns. The company is rightfully focused on strengthening its core technology and offerings, but it has been unable to successfully commercialize anything outside of floor-cleaning robots. The latest casualty was its robotic lawnmower, Terra, which the company says it called off because of the pandemic.
While the company remains the dominant player in its category, we wonder how long that can last given the amount of competition, especially among heavyweights like Samsung (005930.KS) and its expanding line of floor-cleaning robots. Of course, people make similar comments about how long Tesla can remain atop the EV heap with so many major car manufacturers switching gears to all-electric vehicles. The near-term looks safe enough.
Another red flag is the company’s reliance on manufacturing in China, where trade war tariffs initially hit the company’s margins pretty hard until it was granted a temporary reprieve. It even got a $57 million refund in tariffs paid. However, the exemption expired this year, so products imported from China are once again subject to a 25% tariff. The company is relocating parts of its supply chain to Malaysia but may have to raise prices to compensate for the higher taxes.
If you’re the sort of person who is able to recognize signs of mania in today’s markets that surpass the dot-bomb heydays, you’re not afraid to leave a few dollars on the table while going out of your way to avoid risk. You’re also able to visualize where smart home robotics falls on Maslow’s Hierarchy of Needs when things get tight and people start spending less. They won’t stop vacuuming, but they’re not going to be eagerly lining up to buy next year’s model with all the unnecessary bells and whistles.
Conclusion
We like iRobot stock but it isn’t something we want to invest in. The company’s bottom line is in focus now, which means we’re late to the party. We didn’t miss much. In the last 15 years, which covers most of iRobot’s public stock life, the company has underperformed the NASDAQ (+497% return for the NASDAQ versus +417% for iRobot), though it’s mostly kept pace, especially over the last five years. There’s not much to suggest that it’s ready for a serious growth spurt, especially if you’re proceeding with caution in today’s markets as we are.
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Other idea for Robotics: AeroVironment Inc. – AVAV (it is in the ARK fund)
AeroVironment is a California-based developer of unmanned aircraft systems for the U.S. military and foreign allied militaries.
The company’s most popular drone, the lightweight Raven, is the most widely used UAS in the world. It garnered more than $43 million in orders in the last six months alone from a variety of NATO governments.
That’s a timely comment Stan, as we just finished looking at AVAV. While they give lip service to entering consumer robotics, their recent acquisitions show an increasing dependence on U.S. defense spending and a focus on military drones. This technology isn’t new, and we’ve avoided military drones in favor of commercial drone applications where there’s real value to be unlocked. Not likely we’ll cover AVAV until they show some meaningful revenues coming from non-defense applications.