Last week, I noticed one of my articles on iRobot Corporation (IRBT +0.00%) was linked in an overwhelmingly bearish report from hedge fund Ben Axler of Spruce Point Capital.
Specifically, he cited my recent video on iRobot's vSLAM patents -- in which I outline iRobot's plans to incorporate visual navigation in future robots -- to suggest I'm among analysts endorsing iRobot stock under his "Signs of a Robotics Bubble" section. Then, and keeping in mind Spruce Point disclosed a short position in iRobot, he proceeded to offer roughly 60 pages of one-sided criticism aimed at "debunking the fundamental bull case" for iRobot.
Curiously, investors don't seem to be terribly troubled, as shares have climbed around 16% since the report was released. But don't get me wrong: There's a lot to digest, and I have no intention of trying to prove it wrong point by point. In fact, I think it's a valuable exercise for any investor to consider both sides of every story.
But I do feel the need to address two glaring misconceptions in the report regarding the way iRobot has long made clear it operates.
On iRobot's (current) narrow focus as a bad thing
Specifically, it portrays iRobot as riding a wave of unmerited optimism in robotics and as "no longer a robotic innovator, but a troubled consumer product company asking investors to pin its future on speculative growth opportunities."
What's my problem with this thinking? I'm just fine with a small-cap company like iRobot maintaining a relatively narrow focus. That doesn't mean such focus can't backfire if growth slows, but iRobot has happily made it clear home robot sales will comprise around 90% of total revenue in 2014. And, yes, iRobot's defense segment has struggled as government spending has grown unpredictable, but that's why iRobot spent much of the last two years purposefully retooling its business to center around home robotics.
And when iRobot released its more powerful, brushless Roomba 880 last November, that's why I noted iRobot CEO Colin Angle has always favored taking baby steps to gradually improve technology over extended periods of time. Specifically, in January 2012, Angle insisted, "We need to pick applications that have real concrete value to customers, deliver or exceed their expectations, and move on."
On adoption for robotic vacuums
Of course, such a narrow focus is unacceptable if the target market is weak, right?
And that's why Spruce Capital cited an October 2013 global survey from Electrolux, which it says has "profound implications for IRBT." Specifically, it notes that only 1% of survey respondents named a robotic device as their primary vacuum cleaner. "After a decade in existence," Spruce Capital writes, "a 1% response rate is more indicative of failure than future opportunity."
Roomba actually celebrated its 11th birthday last September. But in any case, I'm not the only one who disagrees: In iRobot's fourth-quarter conference call in February, Angle said that robot vacuum cleaner revenue currently accounts for a full 15% of vacuum cleaner sales. He added:
That revenue share is comparable to the level of other disruptive household appliances, such as the microwave oven and dishwasher, at the same stage of their lifecycles, 10 to 15 years following introduction. We believe that as awareness of the category continues to expand, we could see an adoption rate similar to those other appliances.
Sure enough, last month Angle told investors sales for iRobot's Roomba 880 "have exceeded those of all other new products over the same time frame."
What's more, this also doesn't contradict Electrolux's 1% figure. Why? Because they're citing two very different stats: iRobot 15% refers to the percentage of new vacuum purchasers opting to go robotic, while Electrolux was polling how many people already own a robotic vacuum. Even as competition in the space intensifies, then, this bodes particularly well for iRobot's addressable market -- that is, at least, assuming robotic vacuum sales can maintain this momentum as they continue to improve to narrow the gap between upright models.
Foolish final thoughts
I'm under no delusion that iRobot stock looks cheap, especially with shares currently trading for nearly 44 times last year's earnings and 25 times next year's estimates. Even considering both weakness in defense bots and speculation telepresence might not be as big as iRobot hopes, I remain perfectly content holding on to my shares of iRobot.
But I've also owned the stock in my personal portfolio for over two years and purchased with at least a 10-year time frame in mind. If iRobot does pull back in the near future, it should be of little consequence to long-term investors, and I'm convinced it won't be because of a weakening position in its consumer-oriented products.
