iRobot: What Lies Ahead and Conclusion

I call every RVC “Roomba” irrespective of their brand. For me & a couple of my friends, Roomba is synonymous with RVC, and being synonymous is a beautiful thing. They are the market leader in this category but slowly concede market share to other players. Even after the challenges, I consider they can still grow with the expected industry rate as the market is under-penetrated. And the opportunity they provide by venturing into other products. Following are a couple of things that make me optimistic about their future.

  1. Impact on revenue due to acquisition of Aeris.
  2. The increasingly connected customer base. Good proposition for cross-selling in the long run.
  3. Genius Home Platform – Opening up to other companies to participate in the benefits. 
  4. There is only 13% home penetration in the US compared to 25% expected saturation.
  5. Expected Tariff exemption. 
  6. With Malaysia – Reduced dependency on China and hence tariff may play a lesser role.
  7. Expanding DTC to 25% of total revenue. The operating margins are better when sales are made directly to the consumer.
  8. Extended warranties & premium care and maintenance offering.
  9.  Membership program and its long-term potential as Robot-as-a-service provider.
  10. Lawn Mower Market – On hold but expected TAM is around 20 Billion dollars.

Early 2021, The company projected a problematic year but was optimistic about 2022 with shortages easing early this year and other costs reverting to the mean. But the challenges are still the same or maybe worst. They are heading into a year with semiconductor shortages, Labor shortages, rising raw materials costs, and inflated transportation costs. The company faces one of the worst macroeconomic conditions in the short term, but that doesn’t break you makes you strong. Even when I am not all roses like the company and many other analysts, I still believe the company will come out strong after the headwinds. Any improvement in operational efficiencies will provide tailwinds in the long run.

Source: iRobot

Better to be approximately correct than precisely wrong

John Maynard Keynes

I want to be conservative in my assumptions. Sven’s DCF calculator at a 12% discount rate gives me an intrinsic value of ~63$. I have not assumed all roses. For instance, I cut back the earnings per share to 1.25$ for the next two years, which is way less than the 1.75$ analyst provided for just 2022. Instead of 2024 being a good year, I assumed 2025 would coincide with their 2020 performance. Also, My assumption of 5$ EPS is ~35% less than the expected avg EPS of 8.4$ provided by the company. The company is hoping to grow at 16% CAGR. I cut it back to 10% for a standard scenario which makes 50% of the final intrinsic value. The worst-case, which makes 20% of the absolute value, assume the company will grow only at 5%, with new challenges presented every year even after we are well past the current conditions and never replicate what they achieved in 2020. I understand these numbers may not appeal to everyone, or maybe it’s ludicrous and not achievable for others. But the goal is just to come up with a number that I am comfortable believing and is achievable without baking all expectations into those. 

Another exercise I did to find future value is using simple maths assuming three things growth rate, operating margins & PE, and all based on 2019 revenue, and I came up with ~99$ as 2024 price, which provides ~14% CAGR if bought today at 67$.

For me, it’s in buying range as it easily beats my goal of achieving a 12% CAGR. It will be a bumpy ride with another short-term not looking pretty for the company, with tariff costs and supply chain disruptions taking a toll on valuations, which can provide me the opportunity to acquire more at lower prices. I expect 2022 to be another bad year. But there is light at the end of the tunnel with growth opportunities knocking. Management needs to keep doing what they have been doing for the last several years. We need to watch on gross margins, and if the company can deliver on promises even in late 2024, it will be fruitful for investors. 

My story is simple. I have 2 Roomba’s at home, and I believe they fit right into my busy lifestyle. I am optimistic about future aspects, and If they can keep growing at low double digits and improve their net profit margin, this is the business I would like to be associated with for the long term. It is the business I would like to own.

Disclaimer: Stocks discussed here are not recommendations. Please do your research before investing.