If you think you already understand everything there is to know about autonomous vacuum cleaner company iRobot (IRBT 7.37%), then you might want to read this article to the end. Below the surface, the investment thesis is changing and you don't want to miss this opportunity.

And to be clear, this is an opportunity for investors today. Many winning stocks in the past experienced the same important transformation that iRobot is pursuing right now.

A Roomba vacuum cleans a tile floor.

Image source: iRobot.

The old thesis

iRobot makes the Roomba line of autonomous vacuums and the Braava line of autonomous mops. According to a recent study by Research and Markets, the robotic vacuum market is expected to grow at a 13% compound annual growth rate (CAGR) between now and 2026. Put another way, this market is expected to almost double in the next five years. iRobot should benefit from this industry growth because it's a first-mover and the market-share leader.

According to data from the company, iRobot has 75% market share in North America. And, excluding China, it has 62% market share worldwide. There are other players in the space, notably Shark Ninja. But iRobot is well positioned to defend its leading spot, in part thanks to its more than 200 patents related to robotics and artificial intelligence. The key here is iRobot has differentiated its products in the past and believes it can continue to do so in the future.

Of course, we're talking about one-time hardware sales through retail outlets. This kind of business doesn't always turn a healthy profit. But as the premium brand in the space, iRobot has pricing power. And its higher prices have allowed it to be profitable for over a decade.

A transparent touchscreen displays an arrow hitting a bullseye.

Image source: Getty Images.

The new focus

I've just laid out what I'm calling the old investment thesis for iRobot. Don't get me wrong: It's all still true. But the company is making a subtle shift that investors need to recognize. Right now, it's leveraging its market-leading position into a direct-to-consumer (DTC) business.

When the COVID-19 pandemic began, it was fair to assume sales would plummet for iRobot. After all, many of its retail partners were closed for a time. But sales actually grew in the early days of the pandemic, thanks to strong DTC sales. In the second quarter of 2020, DTC sales were up 160% year over year. And for 2020, DTC sales accounted for 11% of total revenue, up from just 6% in 2019.

iRobot is embracing its shift to DTC sales and released new software in August to augment its strategy. iRobot Genius Home Intelligence gives users more control over their floor-cleaning robots, a compelling reason to download the app. But by using the company's app, customers establish a direct relationship with the company. Right now, almost 10 million people have already voluntarily opted to receive communication from iRobot. For perspective, there were only 2.3 million signed up in 2018. 

In short, iRobot is building an impressive DTC business.

A red, wooden figure stands out from a line of white ones.

Image source: Getty Images.

Why it stands out

iRobot's DTC shift provides two immediate benefits. First, DTC sales carry a higher profit margin than regular sales (no middleman to pay), so this could improve the company's financials. Second, it allows iRobot to potentially hear from its customers and make product launches more effective. At least that's the logic behind the iRobot H1 handheld vacuum launch last week. Management believes this is what its audience wants from iRobot.

However, more importantly, a strong DTC business helps iRobot pursue its ultimate goal of establishing multiple high-margin, recurring revenue streams.

One-time hardware sales are tough. Even when you're the top dog, it feels like a never-ending hamster wheel of chasing the next sale. But hardware companies can transition to recurring revenue. Consider Apple: Hardware sales used to be its bread and butter. But as of the first quarter, it now also has over 620 million active subscriptions to various services. 

Also consider Axon Enterprise: At one time it just sold Tasers. But in 2020, 73% of its revenue was tied to a subscription. Importantly, both of these stocks have soared since recurring revenue started becoming a meaningful part of the business.

Last week, iRobot introduced two extended warranty services, which is certainly part of its recurring-revenue strategy. But in a nod to the Software-as-a-Service (SaaS) business model, the company has also started testing a Robot-as-a-Service (RaaS...?) program. Management hasn't provided many details on RaaS or provided clues on what it's brainstorming for recurring revenue streams. But the seeds are being planted.

I don't expect these seeds to grow into trees tomorrow, but I do think it'll pay off long-term. In summary, iRobot is a good business making an important pivot toward something even better. And that gives today's investor a new reason to buy this stock.