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Those of you following the tech space probably know that Google (NASDAQ: GOOGL ) announced last week that it's acquiring Nest Labs, a maker of popular "smart thermostats" and "smart smoke/carbon monoxide detectors," which users can control via a wireless device, such as a smartphone or tablet. This $3.2 billion all-cash deal is the second-largest acquisition in Google's history, behind only its $12.5 billion Motorola buyout.
This acquisition means iRobot (NASDAQ: IRBT ) investors now need to consider Google a potential competitor.
Google's now in the "smart house" market
I recently wrote, "Google's Nest acquisition appears to be an initial step ... in the battle to win the "smart house," in an article which focused on Google's threat to Honeywell, a leader in the building automation space. This is one battle on Google's march toward its apparent goal of being a major player in the "Internet of Things," where autos, machines, people, and everyday objects will be seamlessly connected, providing users with instant feedback. (The Motley Fool's Top Stock for 2014 is a play on this ultimate growth market. Click here if you'd like an instant free report on this under-the-radar company.)
Anything one can currently control wirelessly -- or potentially could control wirelessly -- in the home is now fair game for Google. This certainly includes automated cleaning devices -- and iRobot is the leader in this space. iRobot's bread-and-butter is the consumer robotics space -- which makes vacuuming, floor scrubbing and mopping, gutter cleaning, and pool cleaning bots -- as its home segment accounted for 88.5% of its $61.1 million in revenue generated through the first nine months of 2013. (The company is slated to announce fourth-quarter and full-year 2013 results on Feb. 5.)
In an article on iRobot's 2013 results and what investors should focus on in 2014 that I published before Google's Nest buyout, I wrote: "[M]y main concern is the company's (iRobot's) moat, as it needs to remain high enough to keep competitors at bay. ... Investors need to monitor the competitive landscape, which is heating up in the robotics space." My concern about iRobot's moat has been upped now that Google has entered the smart house space, and could potentially enter iRobot's domain.
iRobot's defense and security business accounted for 9.3% of revenue, while the remaining 2.3% came from miscellaneous other. The company is in the early stages of developing its remote presence and videoconferencing assistance bots, which are primarily targeted to the health-care industry. This business isn't expected to contribute meaningfully to revenue until 2015.
Google publicly stated after capping off its buying spree of eight robotics companies last year with its acquisition of Boston Dynamics that it won't be involved in the military space, as Boston Dynamics has been. So iRobot's defense business appears safe from competition from Google. This positive, however, is muted by the fact that this business has been struggling and experienced a 39% drop in revenue in the first nine months of 2013. iRobot's nascent enterprise business also seems safe, as Google's a consumer-focused company, and seems likely to remain so. (It seems likely Google's planning on using robots in its home delivery service; however, I consider this a consumer-focused business.)
What's next in Google's battle to win the house -- and "smart" it up?
Certainly, iRobot investors need to ratchet up their monitoring of the competitive landscape now that Google has entered the home automation space. However, I think iRobot is safe -- at least for now. It seems to me that other home products, such as smart lighting, would be a much better next step for Google than cleaning robots.
First, there's more synergy between Nest's current products and smart lighting. The value proposition of saving energy costs via using Nest's Learning Thermostat, the company's best-selling flagship product introduced in 2011, could be extended to include using smart lighting. Additionally, lighting has the safety factor in common with Nest Protection, the smart smoke/carbon monoxide detector, launched last year.
Second, it seems more relevant information can be collected via people's lighting habits than their cleaning habits. Given Google's amazingly innovative when it comes to technology, it can be easy to forget that Google's core business is advertising. The better quality data Google collects on users, the more valuable is its primary product. Smart lighting offers immense data collection possibilities: bedtime and other sleep habits, hobbies and leisure activities (surely, a smart lighting product would include choices of various lighting tones and intensities, such as "read" or "chill out"), and even favorite colors, since smart lighting usually has the ability to change colors.
There's another big factor lighting has over cleaning robots -- aesthetics. Surely, one of the major reasons Nest's products are selling so well -- its second-generation of the Learning Thermostat is the best-seller on Amazon.com in the home programmable thermostat category -- are because they sport an easy-on-the eye, streamlined design. That's not surprising, as Nest co-founder and CEO Tony Fadell is a former Apple exec widely considered the the godfather of the iconic iPod.
Sleek, huh? Google will likely want to leverage Nest's design strength by focusing on products that are always (or often) visible in one's home, so the occupants and their visitors can appreciate their aesthetics. Lighting -- just like thermostats and smoke detectors -- fits the bill. Cleaning robots do not.
Foolish final thoughts
iRobot has a window of time to strengthen its hold on consumers before Google potentially enters its domain, in my opinion. No doubt, iRobot's cleaning bots are useful, and many rave about the company's products. However, it seems to me the company could use an offering above and beyond new iterations of its current products that will be more universally desired by consumers so as to gain a wider and stronger foothold in the burgeoning smart house market.
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