Investors weren't pleased with iRobot's (NASDAQ:IRBT) latest earnings report. Yes, customers snapped up its vacuums over the holiday season. But Wall Street didn't like the new profit picture that management described. Earnings gains will be modest over the next few years, executives warned, as iRobot works to fend off new rivals in an increasingly crowded robotic vacuum industry.
"This is a moment in time," CEO Colin Angle said in a February conference call, "where over the next three years, the true winners in the consumer robot industry are going to be determined for the next decade."
Let's take a closer look at what iRobot hopes to achieve over that long-term time frame.
Big growth ahead
The robotic cleaning industry appears to be on the cusp of a long period of growth. The consumer floor-care category expanded at just an 8% rate in the U.S. last year, but robotic cleaners were far more popular, surging higher by 56%. iRobot is the undisputed market share leader, too, with its products taking up four of the top ten selling positions in 2017, according to NPD.
Management estimates there are an additional 13 million households the company can target immediately in the U.S., which would double its current installed base. The robotic vacuum market is still just 10% of the total vacuum segment, though, and over time, the installed base could grow to over 80 million as these cleaning devices go mainstream.
At what cost?
The good news is that iRobot has maintained a solid growth pace even as competition flooded into the industry over the past few years. The Shark Ion Robot vacuum was just one of dozens of new challengers that launched in 2017, yet iRobot still managed to expand sales by 54% in the fourth quarter while keeping its global market share above 60%.
Still, the increased competition is a big threat since iRobot's earnings power will ultimately depend on the number of major rivals that succeed in establishing a foothold in the industry as it matures. The business will be worth far more at, say a dominant 40% market share in 2028, than it would with just 15% of a highly fragmented industry.
iRobot has a few important competitive advantages in this fight. It controls one of the biggest patent portfolios of any electronics company, for one. Its Roomba brand is a household name, too, and has given it a solid retailing platform from which it can launch complementary products like the Braava mopping system.
Ultimately, though, iRobot's success will depend on its ability to push the industry forward with technical innovations like the advanced mapping functionality that drove 2017's demand.
Place your bets
Angle and his team plan to invest heavily in both research & development and marketing over the next few years to try to firm up the company's position in the market. Most of that R&D spending will go toward improving the already successful Roomba franchise. About 25% will be directed at promising platforms like Braava that haven't yet reached high returns on investment. Between 5% and 10% of the cash, meanwhile, will target high risk/high return projects that extend deeper into robotic cleaning and maintenance projects both inside and outside of the home.
It's unclear whether that technological focus will yield the string of innovations iRobot needs to defend its market share over the next decade. But, in any case, the company is doing the right thing by putting up an aggressive fight on R&D and marketing today. Any profits it gives up over the short term would be far outweighed by the value of having a stronger market position in the massive robotic cleaning industry of 2028.