The latest high-tech corporate deal seems a bit like those old Reese's Peanut Butter Cups commercials: "Two great tastes that taste great together."
On Thursday, two great Motley Fool Rule Breakers picks -- stun-gun maker TASER (Nasdaq: TASR ) and robotic housemaid-cum-battlefield warrior manufacturer iRobot (Nasdaq: IRBT ) -- announced a strategic alliance to build robots that incorporate TASER technologies. As an early proof of concept, the companies armed an iRobot PackBot with a TASER-brand X26 stun gun to demonstrate that stun-gun-wielding automatons can effectively perform nonlethal law-enforcement and military roles.
Initial reaction to the news was decidedly mixed. On the iRobot side of the equation, investors cheered the deal enthusiastically, bidding the robot-maker's shares up 5% for the day. In contrast, over at TASER, shares barely budged -- up just 1%, on a day in which the company also announced a 1,420-unit sale to California's Riverside County Sheriff's Department. Color TASER investors underwhelmed.
Why the alliance?
If you've been monitoring the development of robotic warfare as I have these last couple of years, you've undoubtedly picked up on the military's obsession with "collateral damage." The Army doesn't want robots in the field running off on maniacal killing sprees on their own. One recent Military Channel special, profiling robotic warriors fielded by companies as diverse as Britain'sQinetiQ (OTC BB: QNTQF.PK) and America's Northrop Grumman (NYSE: NOC ) and Boeing (NYSE: BA ) , described how one robot in particular required a series of five separate steps to be performed before it could fire a shot. In retrospect, it seems only logical that one of these robot-makers would endeavor to integrate non-lethal weaponry into its design.
Why the investor disconnect?
Rationale aside, both iRobot and TASER must have considered this alliance a good deal for their respective businesses. Why, then, did the market seem about 5% more excited for iRobot than for TASER? On the surface, at least, I suspect it's a matter of numbers. Reading between the lines, and doing a little light number-crunching of the most recent respective 10-K filings, it seems to me that iRobot sold roughly 500 PackBots to the U.S. military last year. For its part, TASER seems to have sold somewhere in the neighborhood of 15,000 units worth of stun guns in 2006 -- a 30-fold difference in magnitude.
Viewed from this perspective, the deal certainly does seem to favor iRobot. For every additional sale it gets out of expanding the PackBot's capabilities, the company pulls in between $50,000 and $100,000 in revenue. In contrast, every incremental TASER sale adds only a few hundred dollars to that company's top line. Take a best-case scenario: Say iRobot doubles its PackBot sales next year, that every one of those is packing (sorry) a TASER-brand stun gun, and that with accessories included, each stun gun sold fetches $1,000 for TASER. You're still talking just $1 million in incremental revenue for TASER, or less than 1.5% of its annual revenue. That seems hardly enough to move the needle on the stock -- no surprise, then, that it didn't last week.
A similarly pie-in-the-sky scenario for iRobot -- it's possible, but I don't think it's likely -- might include 500 additional PackBot sales inspired by the new nonlethal weaponry, yielding potentially $50 million in incremental revenue -- more than 25% of what it pulled in last year. Even the remote possibility of such a scenario explains why the news had significantly more effect on iRobot's price than on TASER's.
Why investors are wrong
If any of the above musings are even close to a correct assessment of why markets reacted to last week's news as they did, then I believe investors are missing an important piece of this puzzle. You see, in the firms' joint press release on the alliance, they specifically stated that arming a single PackBot with a single TASER-brand stun gun was merely intended to show that, yes, a robot can carry a stun gun and incapacitate a target without killing.
But what comes after that concept is proven? What's the second step, and the third, and fourth? The companies anticipate "development of products that may include a full line of TASER kits for iRobot platforms, to a family of fully integrated robots." TASER Chairman Tom Smith foreshadowed: "We have been working on expanding the delivery platforms."
As I read these statements, we can almost certainly not expect armies of PackBots, each toting a single off-the-shelf TASER X26 stun gun. (Honestly, if that were the extent of the collaboration, I'd be pretty underwhelmed myself, despite being an iRobot shareholder.) But it doesn't take a lot of imagination to come up with much more interesting scenarios. Just envision, say, R2-D2, armed to the hilt with TASER stun guns, incapacitating a roomful of crooks.
A picture to warm a sci-fi fan's heart? Sure. And one that suggests TASER investors may be missing the full import of this rebel alliance.