iROBOT CORP (Update 5)

  • Spruce Point has discovered new evidence that SharkNinja (“Shark”) – a major competitor of iRobot (IRBT or “the Company”) – is primed to release a new, high-end, smart, and home connected robot vacuum cleaner (RVC) priced at a 25% discount to the comparable Roomba i7. Another competitor has already begun selling a comparable product at close to half the price of the i7. Whereas Shark and other competitors have until now taken share primarily at the lower and middle tiers of the robot vacuum market, they now will compete at the premium tier. The consensus among bulls is that Roomba is a technologically superior product and the market leader at the premium tier, affording it some protection from pricing pressure. We believe that this narrative is no longer valid: iRobot will now face legitimate competition at the high end of the market.
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  • Management has attempted to drum up investor confidence by pitching the potential of its non-Roomba products – specifically, its robot mop (Braava) and forthcoming robo-lawnmower (Terra) – but we believe that guidance is aggressive on the former (by management’s own admission), and we are skeptical that the latter will meet with commercial success in the U.S. Investors should brace for significant disappointment.
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  • Release Of High-End RV950 Shark Robot Vacuum Appears Imminent: Spruce Point recently discovered that Shark is prepared to release the RV950 – a high-end robot vacuum with features comparable to those of the Roomba i7, but priced at a 25% discount. Product listings for the vacuum have already been prepared on Wayfair and Walmart’s online stores. Shark’s entry into the lower and middle tiers of the market in 2017 represented one of the first non-Roomba robot vacuum product launches by a recognizable and respected home appliance brand, and Shark has since competed aggressively with iRobot’s mid-tier vacuums and has successfully taken market share. We believe that Shark will apply similar competitive pressure to the higher end of the robot vacuum market with the launch of the RV950.
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  • RV950 Representative Of Trend Of Heightened Competition At Top Tier Of The RVC Market: We see the impending release of the RV950, and other recent product launches, as evidence that iRobot competitors – once considered “off-brand” or “no-name” products occupying the lower end of the market – are rapidly closing the technological gap between themselves and Roomba, and that robovacs are thus becoming increasingly commoditized. Formerly-unknown brands are quickly gaining respect from the tech world and are seen as legitimate Roomba alternatives. Even then, competing products continue to be priced at a material discount to comparable Roombas. We estimate that pricing pressure at the high end of the market could cost iRobot ~12 points of gross margin on its Roomba segment.
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  • Aggressive Braava Projections Unlikely To Come To Fruition: Management is aiming for Braava to contribute 10% of FY19 total sales. Given iRobot’s FY19 sales guidance, this implies that management expects Braava sales to grow by over 50% in FY19. This would be entirely out of line with historical growth rates and with Braava’s recent performance in markets in which it has achieved some level of popularity – namely Japan. We believe that Braava sales will grow by no more than 20-25% in FY19 at the high end. Management’s Braava guidance also implies that it expects Roomba sales to grow by just 14-17% in FY19, a meaningful step down from recent growth rates.
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  • Terra A Poor Fit For The U.S. Market: After nearly a decade of development, iRobot finally announced the launch of its robot lawnmower on the Q4 FY18 call. iRobot has a tremendously poor record of developing and selling products outside of its core Roomba line – particularly products meant for outdoor use. We believe that the Terra is a poor fit for the U.S., where lawns are large and difficult to navigate by global standards. In Europe, where the robot mower market is already developed, iRobot will compete with established, respected brands with technologically-advanced mowers, yet with sufficiently deep pockets to weather a price war. This stands in contrast to the conditions which led to Roomba’s success in the U.S., where it came to dominate the market by establishing itself as a first mover and a relatively premium product.
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  • Valuation Makes Little Sense: IRBT shares have run up from $75 to as high as $130 through the recent bull market on little more than sporadic optimism regarding U.S.-China trade talks. We find it puzzling that IRBT shares reacted so positively to what was at best a mixed Q4 earnings call. We believe that increasing competition and downward pricing pressure will continue to weigh on top-line growth and margins, and that multiples are tremendously overextended – how else could every single sell-side price target be below current share prices? A potential tariff hike to 25% remains a material risk for iRobot, and could drive another ~15% downside to IRBT shares.
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