Vacuum cleaner company iRobot Corporation (NASDAQ:IRBT) has had a tumultuous month and now has been hit hard by its latest earnings report. As the Financial Times and other sources report, iRobot saw its stock value fall by 20 percent in after-hours trading on Wednesday, and it has continued to decrease in value in trading on Thursday morning.
iRobot’s fall is occurring despite the fact that the report announces fourth-quarter revenue rose by 54 percent and operating income rose to $23.1 million compared to $18.7 million in the same quarter in 2016. The fall came because, despite these solid numbers, iRobot slashed its expectations for the year as “it said it was looking for earnings per share of $2.10-$2.35 for fiscal year 2018” compared to analyst expectations of $2.70.
This forecast is disappointing, and it has appeared to spark fears of iRobot’s ability to remain the top robot vacuum cleaner (RVC) developer in the face of continual battles to protect its intellectual property as well as rising competition from other developers like SharkNinja. But the fact is that iRobot is the market leader in a field for which there will continue to be high and growing demand. A 20 percent fall in value is a total overreaction, and smart investors should take advantage before its value jumps up again.
The Power of Roomba
While iRobot’s earnings expectations may not be in line with investor hopes, its revenue expectations are bigger and with good reason. iRobot stated in a report last August that despite the growing popularity of robotic vacuum cleaners, they still only make up 21 percent of the global vacuum cleaner market above $200 compared to 13 percent in 2012. RVCs will continue to grow in popularity as society embraces automation in every corner of our lives, and iRobot has a dominant market share with RVCs. That in and of itself should make iRobot an attractive investment after this recent collapse in value.
Furthermore, iRobot has plenty of other avenues to expand beyond vacuum cleaners. It has released robotic pool cleaners and mops already, and is looking into other household appliances such as lawnmowers. Analysts have been talking about the Internet of Things and the smart home for years, with Statista stating that the smart home market will jump from $18 billion in 2018 to $32 billion by 2022. As a leader in one category of smart home devices, iRobot is in a prime position to take advantage of this future growth.
Dealing with Competitors
iRobot may dominate the RVC market for now, but skeptics have argued that it will decline in the face of increasing competition. This is not an unreasonable fear. The company has been embroiled in numerous lawsuits attempting to protect its intellectual property. It sued three Chinese companies last April for intellectual property infringement, as well as lawsuits against :MSI, Hoover, Bissell, and other vacuum cleaners. The lawsuits against the Chinese companies are particularly critical given that iRobot is betting a great deal of its future growth on success in China as well as the constant problem of Chinese property infringements. If iRobot is driven out of China then skeptics would be perfectly justified in their fears.
But that is a future concern, compared to the more immediate problem of SharkNinja. SharkNinja is no overmatched startup. It has successfully competed against Dyson and is selling a good RVC at a lower price point than iRobot. When SharkNinja launched their products, iRobot’s value fell more than 15 percent. Other big names like Samsung (KS:005930) and LGear are also hanging around and could enter the RVC market as well.
But iRobot has a dominant lead, has a major advantage in name brand, and competition does not need to be destructive given how much the RVC market will continue to expand. And while its lawsuits against potential competitors take time and money, iRobot ultimately prevailed in court last year against MSI and Black & Decker. Both companies agreed to leave the RVC market for some time. That iRobot’s revenue has continued to grow massively also indicates that competition is not an immediate threat.
Growth and Opportunity
Concerns of competition and missed expectations aside, the fact is that iRobot is a profitable, growing market leader in a market which will continue to grow and which just saw its value take a significant hit as investors overreacted. It is hard to sum up a “buy low” opportunity better than this.
iRobot is not just a vacuum cleaner company. It is looking to take full advantage of the Internet of Things and automation to help create the smart home of the future, and thus holds massive potential. Even if it is slashing its growth estimates, this company has a history of underpromising and overdelivering. Investors would do well to remember that and take advantage of the current rut.