IRobot Entry Point To A Beaten-Down Growth Stock

Cash & Inventory

The Q4 2019 earnings report beat eps and revenue expectations. During the following day, the stock gained more than 17%. One of the key figures short-sellers often like to talk about is the inventory level and the cash position. After the Q3 Report, the stock dropped, justified with a historically low cash position of $91 million and a high inventory of $248 million. It is rather normal for iRobot (IRBT) to heighten inventory to be prepared for higher customer spending in Q4. This shows in the Q4 earnings report. Inventory decreased by roughly $91 million to $157 million. While cash equivalents and short term investments increased by $165 Million to $256 million. This points to a strong demand for iRobot products. The iRobot Roomba 675 Robot Vacuum was one of the bestselling articles on amazon during the holiday season. Year over Year the revenue increased by 11%, even though iRobot needed to pay 25% tariffs for products produced in China.

At the current stock price, the cash position is roughly 17% of the market cap. In combination with no long-term debt and leasing costs in the upcoming years of only $73 million, the balance sheet of iRobot is very solid. 

Guidance:

The most interesting part of the Q4 results is guidance for 2020. Management projects revenue growth to be between 9-11% and NON-GAAP EPS of $1.70 to $2.30. According to Yahoo Finance, the average sales growth expectation is 9.2%, more or less in line with guidance. But the average expected NON-GAAP EPS is $0.80, midpoint guidance is therefore 150% higher than the average analyst expectation. This leaves room for further earnings surprises in 2020.

How about Q1 of 2020, which is mostly a weak quarter for businesses overall?  

In Q1 2020 a YoY Revenue decline is guided coupled with a NON-GAAP EPS loss of ($0.15) to ($0.40). The average expectation is a loss of ($0.49) and a revenue decline of roughly 10%.

Headwinds:

China Tariffs

iRobot products are part of the List 3 goods and impacted by 25% tariffs.

Mnuchin mentioned the reduction of tariffs will possibly be a part of the second part of the trade deal with China. But iRobot's management is not waiting for this to happen. They built up a site in Malaysia, which started production in November 2019.

During 2020 a third of all Roombas sold in the US will be from Malaysia. Additionally, production is planned to be accelerated. The objective is to cover the complete RVC portfolio of iRobot by the end of 2021. Even if tariffs stay in place, the weight of those on the profitability will weaken during the upcoming years.  

Competition

During the last year competition increased, Ecovacs, Mi, Roborock and Shark continue to take market share of iRobot. In 2014 iRobot's market share was 63%, 4 years later it decreased to 52%. And it will most likely continue to decrease. But does this matter?

Only partly, because the domestic robot market is growing, therefore even a lower market share will lead to revenue growth for iRobot.

There are several predictions on the growth rate of the market: Fortune Business projects a CAGR of 25.3 % over the period from 2019 to 2026, Loop Venture expects a CAGR of 13% from 2015 to 2025,

Marketwatch predictions add up to a CAGR of 13.3% from 2019 to 2024

The expectations are varying in numbers, but all of the researchers conclude that the market will grow double-digits over the next 5 years.

Diversification of the Product portfolio

Besides this, iRobot is also diversifying its product portfolio. During 2019 Braava, a mopping robot, grow in revenue YoY by 28% and generated $100 million in revenue. The Braava is expected to also have strong growth rates in the upcoming years.

The mopping and mower robot markets are both rather new markets and iRobot is on its way to take a strong position from the beginning.

iRobot is mostly a B2C company and does not focus much on B2B. But especially the lawnmower robot ”Terra”, could open up a great opportunity in the future. Several Companies could save personnel expenses by investing in iRobot products. This market is nearly untapped by iRobot and could be a future growth catalyst.

Conclusion

To this date, iRobot shares are down approximately 60% from its ATH of $130. The overall opinion is very negative, reflected in very low earnings expectations. Also, 52% of the float is shorted. During this recent downtrend, the overall business model has not changed much. Going forward it appears to be strengthened when looking at the product portfolio. In the long-term and with more positive earnings surprises the stock price will most likely adjust. Based on my intrinsic Valuation of iRobot I came up with a value of $80.44 per share. Overall iRobot has a low double-digit growth rate and will be even more profitable in the future. Given the current circumstances, the stock is priced reasonably low at $53 and offers a great buying opportunity.