iRobot (NASDAQ:IRBT) has made its Roomba robotic vacuum cleaner (RVC) a household name, but the last several years have been challenging for this company with slowing growth and increased competition. Recent news of a tariff exemption and refund and better-than-expected preannounced Q2 earnings have caused the stock to rebound, but it's still significantly trailing the overall market over the past three years.

^SPXTR Chart

Stock data over the last three years through July 14, 2020. ^SPXTR data by YCharts

Let's take a look at the business, its growth plans, the challenges, and whether its stock is a buy today. 

The business of a robot maker

Roomba sales are the company's predominant source of revenue, making up over 90% of the top line last year. The remaining revenue comes from its Braava mopping segment products. The company reached a record $1.2 billion in annual revenue in 2019, but over the last three years, growth has slowed. And in its most recent quarter, revenue actually declined year over year. 

IRBT Revenue (Annual YoY Growth) Chart

IRBT Revenue (Annual YOY Growth) data by YCharts. YOY = year-over-year.

The biggest reason for declining growth is increased competition. While iRobot has enjoyed a leading market share, new entrants to the market have chipped away at its lead. This has also forced the company to keep prices in check, even as it has faced import tariffs up to 25% on its China-manufactured robots starting in September 2018. The coronavirus made things worse by disrupting the supply chain, causing iRobot to fall short of demand in the most recent quarter.

Price pressure and tariffs have squeezed gross margins from 50.8% in 2018 to 44.8% in 2019, to an even lower 40.5% in Q1 2020. The company has a solid balance sheet with $236 million in cash and marketable securities, no debt, and access to a $225 million line of credit, if needed. The tax refund of $57 million for its import tariffs will also help bolster the cash position.

With the gut punch of its revenue decline for the most recent quarter, management initiated a three-part plan to manage through what could end up being a lengthy recession. 

Three initiatives to drive growth

The first part of its strategic growth plan is to differentiate its products through an improved experience. Features that allow a more responsive and transparent operation are being prioritized to better integrate into consumers' habits. With a speedy turn for software upgrades in three months or less, this could be a quick win.

A Roomba cleaning the floor with a woman and dog sitting nearby

Image source: iRobot.

The second is to build a stronger relationship with customers. Robots will learn the areas of your home, understand specific commands to clean certain areas, or connect to your smart-home devices. It's also looking to engage its 5 million consumers who have opted in for product and company updates.

Lastly, to drive loyalty, programs such as subscriptions for replacement supplies, leasing options, and paid software upgrades are being considered.

As with any growth plan, it will take time for results to materialize, and there are a number of challenges along the way.

The challenges ahead

The company's revenue growth derives from a combination of the number of units sold and the average price of each. Over the last several years, unit growth has been declining faster than revenues as the mix of higher-cost devices has been propping up the overall revenue growth.

Metrics

2017

2018

2019

Revenue growth YOY

34.7%

23.6%

11.2%

Average unit price change YOY

10.8%

6.5%

5.4%

Unit growth YOY

25.7%

22.7%

10%

Data: company earnings announcements. Chart and calculations by author.

Generally, investors should be happy about higher prices, but having unit growth slow is a sign that it could be tapping out its early adopter customers and not breaking into the mass market.

The company seems to be between a rock and a hard place with its product pricing. Its low-end products (Roomba at $249 and the Braava at $179) are priced higher than most manual vacuum and mopping solutions, so it's challenged with attracting a value-minded buyer. For its higher-priced products, it found it had limited ability to raise prices in response to increased tariffs in 2019. This is an indicator that the strong brand power it has counted on in the past could be waning.

Lastly, it's had difficulty diversifying its revenue stream outside of RVCs, but not for lack of trying. The list of discontinued products includes two versions of a pool cleaning robot, a gutter cleaning product, and even a talking doll. To make things worse, the onset of the pandemic has caused management to postpone the launch of its lawn mowing robot, Terra, that's been in the works for several years.

What's the bottom line for investors?

Even the company's good news comes with a note of caution for investors. The exemption from the import tariffs ends in August 2020, and it is not known whether the exclusion will be extended. The preannouncement of better-than-expected Q2 revenue might just be an unsustainable one-time stay-at-home coronavirus bump.

With slowing growth, lack of a substantial revenue stream outside of its robotic vacuum cleaners, and a strategic plan that's yet to show results, there are too many factors playing against this stock right now. Until the company shows a consistent track record of growth, investors would be better off looking elsewhere to invest their hard-earned money.