Investors looking to clean up their portfolios ahead of the new year may want to consider iRobot (NASDAQ:IRBT). The Massachusetts-based maker of Roomba robotic floor care products has the potential to infuse some growth into a portfolio filled with the usual mega cap technology names.
The mid-cap stock is a consumer electronics leader in its own right—and a unique play on increasing demand for innovative home care products.
While iRobot's stock has had a strong year, unlike most tech stocks, it is not trading at an all-time high. As the company gets set to report third-quarter results after the market close on October 20th, here are a few of the reasons why iRobot can roam higher.
- iRobot's Dominant Market Position
iRobot pioneered the robotic floor care space. As the category creator and leader, it has stayed ahead of the competition by continually building out its portfolio of artificial intelligence (AI)-based cleaning robots.
At first the robotic cleaner concept seemed a bit out there, something akin to a Jetson's cartoon accessory. But consumers have embraced Roomba over the years as a convenient way to keep their homes (and hands) clean. iRobot has amassed 6.9 million proud robot parents with which it aims to build lifetime relationships.
The company has the potential to expand its first mover competitive advantage by broadening its portfolio. Like Apple's iPhone, iRobot has launched several new models over the years. Today, it offers its most extensive lineup ever with Roomba and Braava jets available at prices ($199 to $1,099) that cater to a wider audience. This stands to build on its army of over 9 million connected robots.
In recent years traditional vacuum companies such as Dyson and Shark have joined consumer electronics giants like Samsung and Panasonic in getting into the robotic vacuum game. This has eroded iRobot's share in the $200-plus vacuum market from 64% in 2016 to 52% last year. Despite this, iRobot still has a huge lead with its closest competitor at a 14% market share.
- iRobot's Product Mix is Shifting Favorably
After recording a record $1.21 billion in sales last year, iRobot is on pace to top that this year despite the challenging consumer spending environment. Although the expected 2% revenue growth in 2020 isn't great, top line growth is forecast to accelerate to 9% in 2021.
The bears will point to the fact that growth has slowed from iRobot's early years when the company posted sales growth of 35%, 24%, and 11% in 2017, 2018, and 2019, respectively. This tends to happen as technology innovators mature. Yet, there's reason to believe that a return to double digit growth is in the works.
What's most encouraging is that iRobot's product mix is shifting in its favor. The highest end of the market consisting of $500 and up Roombas now accounts for around 60% of its mix compared to about 20% in 2016.
As far as profitability, iRobot has multiple margin expansion levers at its disposal. An increasing focus on software should drive higher subscription-based revenue. Cross-sell and upsell opportunities will also be relied upon for margin expansion. And of course, a reduction or elimination of tariffs on Chinese imports would also help the bottom line as would a reduced dependence on China-based manufacturing.
- Roomba Has Opportunities to Pick Up Customers
The global robotic vacuum cleaner (RVC) market while rather niche is far from saturated. Today, the RVC market represents roughly a quarter of the $11 billion high-end vacuum cleaning market. This is about twice what the segment's share was in 2012.
More importantly, the RVC market is growing at a 22% clip compared to 9% for traditional vacuum cleaners. iRobot estimates its current installed base is about 12.5% of its addressable market. Over the long haul it sees the potential to market to over 100 million more U.S. households in addition to international expansion opportunities. Almost half of iRobot's revenues are derived outside of the Americas.
Interestingly, the current pandemic may spark a second wind of high growth for iRobot. People have perhaps never been so in tuned with maintaining a clean environment in their homes and workplaces. This may be creating a broader market for iRobot that includes consumers that previously never considered anything other than regular vacuums and mops.
Sanitation-focused shoppers are discovering the value of the Roomba to rid the home of dust and dirt daily instead of doing the normal weekly or monthly cleaning routine. A clean home is being linked to a healthy home—and as consumers put a premium on clean, they are more likely to pay a premium for an iRobot product.
With a dominant share of the RVC market, iRobot is in a good position to continue to convert safety conscious, convenience-hungry consumers to its connected robot cleaners. As the battle against COVID-19 goes on, look for iRobot to capitalize on the cleanliness trends sweeping the globe. The cutting-edge cleaning technology company deserves to be programmed into a growth portfolio.
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