Why iRobot Has High Growth Prospects
- By Robert Stephens, CFA
A growing new product pipeline could boost iRobot Corp.'s (IRBT) stock price. Enhanced features such as detailed mapping and integration with other smart products could allow the company to extend its ecosystem.
Gradually adding premium features to lower-priced models may increase the size of the company's total addressable market. This could increase its market share in a growing industry. The use of patent litigation may also enhance its competitive advantage.
Although tariffs may pose a threat to its financial outlook, cost reductions and potential changes to its manufacturing locations could offset them. Having gained 7% in the last year versus a 7% fall for the S&P 500, the stock could offer investment appeal.
Innovation
The release of new products could catalyze the financial performance of the business. In the most recent quarter, the company released its i7 and i7+ Roomba models. They provide additional features that further differentiate the product from rivals, including an ability to self-empty up to 30 times. They also feature new algorithms that enable them to build detailed maps of different rooms, providing additional customization opportunities. New products contributed to a third-quarter revenue increase of 29%. The pace of new product launches is expected to be maintained through 2019.
The maps created by iRobot's products have the potential to extend its ecosystem. At present, robots across the home work in isolation. Detailed mapping may allow them to work as part of a team alongside other smart devices, which could make smart homes more efficient. Integration with smart speakers such as Amazon's Alexa and Google Assistant is expected to improve. This could allow the company to offer increasingly innovative smart home experiences that leverage the spatial awareness of its products at a time when sales of smart speakers in the U.S. are forecast to grow 26% per annum over the next four years.
Growth prospects
The company's strategy of introducing new features and functionality to its premium products, and allowing them to filter through to lower price points, could increase its total addressable market. In doing so, the company is increasing its value proposition among price-conscious consumers. The recent launch of its e5 products, which included a range of features like debris extractors, were previously only available at a higher price level. An ability to capture different price points could boost the company's market share at a time when the robotic vacuum cleaner market is forecasted to grow at an annualized rate of 13% through 2022.
The recent success of patent litigation against a number of infringing manufacturers highlights the competitive advantage iRobot has. It means that products similar to its Roomba vacuums from competitors such as Hoover and bObsweep cannot be imported into the U.S. As innovation continues, the company may be able to successfully defend its 62% share of the global robotic vacuum market.
Tariffs
A 10% tariff was imposed on all vacuum cleaners manufactured in China and imported to the U.S. in 2018. IRobot decided not to pass the extra cost on to consumers, which is expected to result in a $5 million reduction in its fourth-quarter gross margin. The tariff was increased to 25% at the beginning of 2019. The company expects this to put additional pressure on the wider vacuum industry. Further increases to the tariff could be ahead, which may result in lower sales or weaker margins depending on whether the company passes the costs on to consumers.
In response to the tariffs, iRobot is seeking to become increasingly efficient through a cost reduction strategy. It is expected to make an impact on its financial performance as soon as the current fiscal year. It has also suggested that it has scope to relocate where its products are manufactured in order to avoid future tariffs. Since its sales outside of the U.S. are currently unaffected by the tariffs, the company may focus increasingly on international sales in order to diversify its business model.
Outlook
New products could catalyze iRobot's stock price. Continued investment in features such as detailed mapping could extend the company's ecosystem and increase its appeal at a time when the smart speaker market is growing rapidly.
Lower-priced products with premium features could broaden the appeal and increase the company's total addressable market. Patent litigation may enhance its competitive advantage and boost market share.
Tariffs could pose a threat to future growth, though they may lead to a more efficient and diverse business. Having outperformed the S&P 500 in the last year, iRobot's stock appears to offer investment appeal.
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This article first appeared on GuruFocus.
