Is the Market Excitement Over iRobot Overblown?

The potential of robots makes iRobot an interesting company, but so far the stock has largely disappointed due to limited revenue growth.

Jan 18, 2014 at 9:30AM

The recent news that (NASDAQ:AMZN) wants to pursue delivering packages via drones and the decision of Google (NASDAQ:GOOGL) to purchase several robotic companies have pushed investors into iRobot (NASDAQ:IRBT). The company most famous for the robotic vacuum has yet to move significantly beyond home robots after several cutbacks in spending on military robots. Investors might want to be careful about rushing into the stock based on the robotic theme.

The excitement over the recent news from and Google sent iRobot spiking higher, but the initial enthusiasm will fade until the company can show a revolutionary product beyond the vacuum series. A few recently released robots which include an update to the popular Roomba vacuum line offer some promises, but the robots might not provide the revolutionary technology envisioned by investors.

Dreaming of drones
Most investors are familiar with's purchases of robotic businesses. The company has primarily focused on improving the fulfillment of orders in its giant distribution centers. The news regarding Amazon's plans of using drones, or unmanned "octocopters," to deliver packages got the market excited about the robotic sector in general. eventually hopes to provide 30-minute package deliveries within a 10-mile radius. If the company could pull off such a service, it would indeed utilize robotics to gain a substantial lead over competitors.

Likewise, Google recently made its eighth purchase of a robotic company in the last half of 2013. The buyout of Boston Dynamics provides an engineering company focused on mobile research with robots for the Pentagon that could be part of a next-generation army. The Sand Flea robot can leap 30 feet into the air and land on a building's rooftop, while the Cheetah robot can run at more than 29 miles per hour. Ironically, Google says it doesn't intend to pursue military contracts, which makes one wonder if it, too, isn't attempting to develop a type of unmanned delivery service.

While these products grab the headlines, neither appears material to either operation unless can obtain approval from the Federal Aviation Administration to use the delivery drone -- which is a big hurdle. For now, the robotics divisions mostly provide margin improvements in operations. Google's purchase provides a distraction that takes the search giant's attention away from improving its mobile operating system or its search algorithms.

iRobot investors need a vision beyond cleaning floors
The latest exciting robot release by iRobot is the Scooba 450. According to the company, the 450 has a three-cycle cleaning process to maintain constantly clean hard floors and wash away up to 99.3% of bacteria. The new robot is interesting, but it might not overly excite investors or provide enough profit to change the situation considering that the home products division is already sizable at more than $400 million in annual revenue.

The new Ava 500 video collaboration robot has some intriguing aspects, as it enables people working off-site to participate in meetings and presentations where movement and location spontaneity are important. In essence, a worker's robot double participates in meetings from afar. The product looks like a moving computer screen, so some advancement in design might be needed to make this product appealing. The second and third generations have some promise. See a video demonstration here.

Another interesting robotic application involves health care products that function in a similar manner. The RP-VITA remote presence robot provides a telemedicine solution for patient care that combines the latest in autonomous navigation and mobility with the latest in telemedicine technology from InTouch Health. The robot allows medical specialists anywhere in the world to communicate with patients with assistance from local nurses. Though it has an interface that looks similar to that of the Ava 500, this robot might have a higher application rate considering the value of doctors' time and the ability it provides them to quickly attend to medical needs when not possible via physical presence. In addition, coordination with an on-location system expert might facilitate greater product use and accuracy.

Guidance suggests positive future
iRobot financials remain an enigma for investors. The futuristic excitement of robots hasn't provided growth for the company lately. In fact, third-quarter revenue actually declined from the previous year. Another quirky concern is that the high-tech futuristic company only spends $15 million each quarter, or roughly 12% of revenue, on research and development. It actually spends more money on selling and marketing, which suggests that the products don't sell themselves very well. Also, one would have to guess that and Google are outspending iRobot on research and development in the robotic sector.

While the near-elimination of domestic defense spending on iRobot products hurt the company's recent growth, management forecasts solid mid-to-high-teen growth rates. The new products could reinvigorate the company's growth and provide value, but it could be 2015 before the Ava or RP-VITA platforms have a major impact on iRobot's revenues.

Bottom line
The promise of drones and robots that handle everyday basic needs naturally excites investors, but unfortunately iRobot hasn't been able to create products for industries that are willing to purchase them. The recent guidance calls for mid-to-high-teen growth rates, which offers some promise, but the investor community isn't convinced yet, with analysts only forecasting 14% revenue growth for 2014. The company needs to show some real revolutionary progress to make iRobot a long-term investment instead of a futuristic dream.

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Fool contributor Mark Holder has no position in any stocks mentioned. The Motley Fool recommends, Google, and iRobot. The Motley Fool owns shares of and Google. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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