The Downside to Robots? Almost None

Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I love my IRobot (NASDAQ: IRBT) Roomba vacuum cleaner, as I find myself able to spend my time productively. Therefore, I thought it would useful to do an analysis of the company’s strong and weak points to determine whether or not it would be a good investment.

Strengths

  • Zero debt on balance sheet, $189 million in cash. This means it can withstand some lean times, and has money to put into R&D.
  • Long head start over other consumer robotics companies.
  • Very strong patent portfolio.
  • Created the robotic vacuum cleaner 10 years + ago, and has been refining the product ever since.
  • Expects home robot business will grow between 25 and 30% in 2012, and continued growth in 2013.
  • Excellent balance sheet and growth rate for a stock trading at 15x current earnings.
  • Increased quality of home robots has led to fewer returns of the products.

Weaknesses

  • Marketing- only recently did the company really begin to help consumers become aware of its product, and that is via banner ads on Facebook, and such literati websites as the New York Times. IRobot had a long, long head start in consumer robotics, and most people are still barely aware of their products. While the Roomba and Scooba are not cheap, and thus not ideally suited to the medium, I am surprised we haven’t seen any new infomercial to raise consumer awareness/ boost sales. Although, they did create an infomercial when they first created the product.
  • U.S. government funding and program delays, continued in the latest quarter, downgrading expectations for the defense portion of the business. The outlook for 2013 for defense spending with the company has dropped. The company has scaled back this portion of their business, until such time as budgets allow greater purchases.
  • Recent acquisition of Evolution Robotics was dilutive to shareholders.

Opportunities

  • The market for consumer robotics is, in my opinion, set for take-off. This is in part due to advances in the fields of smart phones and game consoles, which has reduced the cost of sensors and gyroscopes.
  • According to this column in bizjournals.com from the middle of this year, “Robotic vacuum cleaners, however, have penetrated only about 10 percent of the potential U.S. market and about 5 percent of the international market.”
  • The possibility of a buyout by a company with much larger resources and better marketing. Here I am thinking of Google (NASDAQ: GOOG) or Apple, who will be getting into the robotics market. Google has a whole division of their company named Android and keeping that name was not random, and at Google X Labs there are plenty of robots running around (well, maybe not running ... then again). And as long as Apple has iEverything, why not iRobot? That said, the egghead culture at Google would be the perfect match for this MIT founded company.
  • Recently introduced the Roomba into more worldwide markets. Specifically in Japan, it has been doing very well.
  • Recent acquisition of Evolution Robotics will expand IRobot’s automated floor care offerings they will be able to use their technology in other products as well, also offers the potential for greater purchasing power, resulting in cost savings.
  • Must create more brand awareness. They have great products (which I can attest to) but as I stated above, they must do better in the marketing department. Creating greater awareness would lead to far greater sales.
  • Long term prospects remain good for military robotics, because they offer a positive ROI, despite the fact that there are shortfalls with the budget right now. The future of warfare (ugh) is going to be increasingly fought by machines (queue Terminator music)

Threats

  • With the burgeoning market in home robotics will come competition. For example, Neato Robotics featured here has come out with a competitive vacuum cleaner, that, according to reviews I read on Amazon is deemed on par with the Roomba. Also, there are vacuums from Asus, Infinuvo, Hoover, and Samsung amongst others.
  • High margins in home robots will lead to even further competition.
  • In the military segment, Lockheed Martin and General Dynamics will both be competing for government contracts along with others.

Bottom Line

This is a relatively small company with a market cap of $500 million that I have to shout from the heavens, over and over again is cheap, has no debt, has great intellectual property, really good products, was an innovator, the co-founder (Colin Angle) is still the CEO, so you can expect him to invest for the health of his baby …

If I have to repeat myself over and over, I see a lot of upside to IRobot, and not that much downside. I have my money in here, and I am tremendously bullish on the company.

Now, if anyone out there has a well thought out bearish position on it, I would love to hear your reasoning! Please leave a comment below.


margiecfl has long positions in Google and IRobot. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple, Google, and iRobot . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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