Growing up and watching sci-fi kid’s movies gave us a little glimpse into the future — everything Robots. We may not have that sophisticated AI technology yet, but we are on course. We may not realize it, but robots surround us. One of those robots is our robotic vacuum cleaner (RVC). I purchased my first RVC Roomba in 2016, and it introduced me to the company iRobot. Since then, I have bought and sold their stocks multiple times. Last year, the stock had a wild swing when it touched 190$, then quickly fell back to 127$, and since then, it has been steadily declining and currently trading at ~67$. Growing at a decent pace and trading at somewhat lower than market multiples, a relatively debt-free company, has kept me interested. It’s always an excellent candidate to keep on the watch list.

I will again follow the simple pattern.

1. What is the industry?
2. What is the business?
3. How do they make money?
4. What are their financials?
5. My Story & Conclusion.

THE INDUSTURY

Robotic Vacuum Cleaner falls under Consumer Discretionary sector & Household Appliances sub-industry. House durable industry in the last two years experienced a boom cycle. The stay-at-home mandate made consumers change their spending habits from dining out to home entertainment, home improvement, and electronics, which stimulated the sector. The tailwinds are more or less over and steering straight into headwinds caused by semiconductor shortages and supply chain issues. Nonetheless, TAM (Total Addressable Market) is huge because of less penetration, but not everyone is excited about the $ they shred and the value they get from these robots. Irrespective of TAM and its challenges, SAM (Serviceable Available Market) and growth opportunity is still pleasing. A simple google search reveals many paid market research reports to understand that it’s a growing industry and will continue growing at a healthy rate.

Similar robotic products are present for mopping, Cleaning pools & mowing lawns. The market for all these products is growing. The RVC market is fragmented, with many new and traditional players. i.e., Shark, Ecovacs, Neato, LG & Samsung, etc.

THE COMPANY

iRobot is a cofounder-led company. It started with robots for space exploration and military defense but switched to manufacturing Roomba in 2002. You can find all the exciting history in an article. Click Here. It’s an innovative company with a history of outstanding AI products. Today iRobot is the leader in the RVC market. Following are the products on the market:

• Robot Vacuums – Roomba – Floor vacuuming robots at varying price points ranging from approximately $250 to $1,099.
• Robots Mops – Braava – Family of automatic floor mopping robots designed exclusively for hard-surface floors at price points ranging from $199 to $450.
• Coding Robots – Robots designed to help children learn how to code. They are priced at $129 and $199.
• Combo: Entry-level combination of vacuum and mop.
• HandHeld Vacs – Prices at 250$.
• Terra – Lawn Mowers – On Hold – Company Reported and I quote “We suspended go-to-market plans for our Terra robot mower during 2020. While we continue to believe that product diversification is an important element of our long-term growth strategy, this specific initiative is expected to remain on hold for the foreseeable future in part because we believe our ability to successfully and efficiently bring new product categories to market will be enhanced by our near-term investments to build stronger, enduring customer relationships and nurture the lifetime value of these relationships.”

According to Company, Its total addressable market is 30 Billion dollars, including robotic vacuum and air purifier products but excluding Lawnmowers. They have 12Million plus connected users, which they expect to be around ~30 million by 2024. The connected customer provides more attractive economics for iRobot because customers tend to purchase other accessories and products directly from iRobot.

iRobot last year bought Aeris, an air purification product company. The company foresees to generate 150million+ dollar revenue from these products, up-selling & cross-selling to their connected solid customer base. The company is projecting rosier 2024 goals of 16%-18% CAGR growth, Which is more or less in line with the industry expected growth.

One important thing to know is that manufacturing is outsourced to a third party in China. The manufactures supply specific quantities of products that align with the demand forecast. That is why they are not immune to deteriorating relations between US and China and supply chain issues. SOURCE.

They have three plants in Southern China but recently started exploring Malaysia and have set up three plants in the country. According to the company, additional locations are under consideration. Malaysia will ramp up to 85% US volume by 2022.

Key challenges

1. Competition from other cheaper manufacturers. Pressure on Margins.
2. Effective September 24, 2018, the US government implemented a 10% tariff on certain goods imported from China, including most of those imported by the company. These tariffs were increased to 25% on May 10, 2019, and were slated to further increase to 30% in October 2019 until a last-minute interim deal was reached between the United States and China. On April 24, 2020, the United States Trade Representative granted iRobot a temporary exclusion from Section 301 List 3 tariffs. As extended in August 2020, this exclusion eliminated the 25% tariff on Roomba products until December 31, 2020, and entitled it to a refund of $57.0 million. Effective as of January 1, 2021, the tax is applied again.
3. Supply chain issues.
4. Raw material rising cost.
5. Semiconductor chip shortage.
6. Higher Oceanic transport costs.
7. Higher Air Freight Cost.

In the following article, I will try to understand how they make money and dig a bit deeper into finances. Until then, Namaste.