iRobot (NASDAQ:IRBT) shareholders have been on a wild ride these past two months. The stock skyrocketed 20% in July after second-quarter earning trounced estimates. Then, the stock fell to pre-earnings levels in mid-September as SharkNinja entered iRobot's main market. CFO Alison Dean spoke at the Morgan Stanley Investor Conference earlier this month; we'll take a look at some things she had to say in an attempt to get a better handle on the company's prospects.
Roomba is iRobot
Sometimes you can learn as much from what is not said as you can from the spoken word. That is the case here. iRobot has three product lines: Roomba robotic vacuums, Braava mopping, and Mirra pool cleaning. In 30 minutes, Alison Dean did not mention the Mirra product line once. She mentioned Braava one time in the first minute, and every other word about any current products and strategies dealt with the Roomba line. Dean's words combined with management's report earlier this year that the Braava family comprised only 10% of the company's revenue make one thing abundantly clear. For the time being, Roomba is iRobot.
A premium-focused company
Dean mentioned this several times in her presentation. Here is a sample of what she had to say:
As you mention our strategy has been in the premium end of the market and we define that as vacuum cleaners that cost $200 or more. Within that offering, we think it's important to have multiple price points. So you can enter the Roomba family at the $300-350 range and you can pay all the way up to $900 for our highest featured products.
iRobot feels strongly about this, partly due to the more intense competition at the lowest price points. Further, iRobot feels it is ahead of the pack in innovating higher-end features that improve the consumer experience. Dean mentioned that the company's new product development strategy typically has been to add a product at the high end of the range.
Competition is good
On the same day that SharkNinja's entry into the market sent iRobot's stock plummeting, Dean welcomed competition and went as far as saying new competition is good for iRobot:
We view generally the competition coming into the space as good. There's a lot of awareness still to be created that robotic vacuum cleaning exists and that it performs well. So, as other competition comes in, particularly consumer brands that consumers recognize and appreciate, it adds a lot of value to the segment.
iRobot is not terribly afraid of competition at this point, nor should it be. It has a wildly popular product in a rapidly growing market. At the same time, one has to believe a little bit of this was company-speak. I think we all agree that there are more profitable ways to create market awareness than having another company chip into your sales volume.
China is complicated
iRobot got into China late and had to adjust strategies more than once. The first adjustment came when its heavy focus on brick-and-mortar stores turned out to be misguided and iRobot worked to find an effective online distributor. Now Dean says the company is reassessing its sales strategy in China, "We are doing a level of analysis now to try to segregate out what was once one big market into two separate so we can identify the growth patterns in each and modify if we have to."
The biggest takeaway here is that iRobot is feeling competitive pressure from Ecovacs and XShuai at the lower end of the premium range and would like to focus more on higher-end products. The company feels that taking a page out of the Starbucks playbook and catering to the aspirational middle class in China will pay off in the years ahead.
There has been a lot of buzz about the smart home, but from what Dean said, the smart home may not be the next revenue stream for iRobot, "We haven't chosen a path there yet. We're really in that exploratory phase. It's early days and we are in an exploratory phase."
Instead, it is possible that the next revenue stream may come from a product that has had much less publicity. At the conference, Dean said, "We've publicly disclosed that we are working on a robotic lawn mower, so that's the next physical product that we think is important to the future."
This will be interesting to watch. Things change fast in the world of technology, and it is quite possible some smart-home application could be monetized before an iRobot mower comes to market. The robotic lawn mower possibility is interesting in its own right. The Washington Post estimates there are approximately 40 million acres of lawn in the lower 48 states. And while it seems there would be more complexity in making a robotic lawn mower and malfunctions would be more costly than those of vacuum cleaners, many homeowners would rejoice in getting a reasonably priced robot to cut their lawns.
Foolish final take:
We don't know what is next for iRobot and the company likely wouldn't disclose the timing of new product line launches even if it could. Dean's words do make it clear that iRobot's near-term is tied almost exclusively to the Roomba. The market seems to agree, as evidenced by the 19% drop in iRobot's stock price in the two days after SharkNinja entered the market. However, if the overall robotic vacuum cleaner market triples, as management believes is possible, this could be a nice entry point for iRobot investors, regardless of the competition.