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Opinion: The wild mystery ride of Roomba maker iRobot

MarketWatch logo MarketWatch 4 days ago Therese Poletti

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Editor’s note: The opinions in this article are the author’s, as published by our content partner, and do not necessarily represent the views of MSN or Microsoft.

A once obscure robotics company known for robotic vacuums has seen its stock gone on a wild run that is even more perplexing than trying to use a Roomba without getting it stuck on your area rug.

In the past year, iRobot Corp. (IRBT) —founded 27 years ago by a trio of Massachusetts Institute of Technology roboticists—has suddenly seen its stock soar 155% in the past year, as the S&P 500 index (SPX) has seen a 13% gain. Sales of its Roomba vacuums, the first commercially successful consumer robot, have also grown, but not that much: iRobot’s sales were up a bit more than 25% in the first six months of the year.

The Bedford, Mass.-based company saw its stock surge past $100 for the first time in May, not long after it sold its military business, which has helped its profits jump in the past two quarters. But investors seem to be betting on one of the few pure play robotics investments as a way to invest in some of the hottest buzz words in tech: artificial intelligence, robotics and the smart home.

“The stock started to react favorably after they sold the defense business and the consumer business was starting to come into its own,” said Ben Rose, president and analyst of Battle Road Research Ltd. in Lexington, Mass., who currently has a hold rating on the stock. “More recently, the whole buzz around the integration with the Internet of Things—connection of everyday devices to the internet—it has taken on a new persona of sorts.”

© Provided by Dow Jones & Company, Inc.

That “new persona” is not quite Rosie the Robot of “Jetsons” fame, but the Roomba has gotten smarter and cleans better, at least for some customers. The newest Roombas have built-in wireless connectivity, the ability to map out furniture patterns and other obstacles in your house, and can now begin vacuuming on command with your voice, via Amazon.com Inc.’s (AMZN) Alexa voice assistant.

“The future of the smart home requires an understanding of what is in the home and where things are in the home,” Chief Executive Colin Angle said at a Canaccord Genuity conference this week. “If I want to tell my Amazon Alexa to turn on lights in the kitchen, the house needs to know where the kitchen is…and we can do that.

“iRobot has embarked on a path to do what Google did for digital data with physical data: Organizing physical data in the home to enable the smart home,” Angle said.

But do consumers really want their vacuum cleaners to perform that function? The company does allow an opt-out from that option, but if you choose it, you cannot command your device with Alexa. For the devices to work together, consumers have to allow home mapping data to be shared with tech giants like Alphabet Inc. (GOOGL)(GOOG) and Amazon.

iRobot hopes its Roomba robot vacuums will be much more capable in the future.© Provided by Dow Jones & Company, Inc. iRobot hopes its Roomba robot vacuums will be much more capable in the future.

In the past few years, the Roomba has become more mainstream, so much that Silicon Valley futurist Paul Saffo, an associate professor at Stanford University, said he does even not own one anymore.

“You [also] wouldn’t catch me dead with an Alexa in our house,” he said. “I have to be an early adopter.”

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Many customers have already given up on their Roombas after running into issues, and dreams of them being a smart-home hub seem overly optimistic at best. The reviews of the different versions of the Roomba on Amazon range widely, from loving it, to problems with the battery, area rugs, bumping into things, and Wi-Fi issues. Consumer Reports doesn’t even have a Roomba as it’s top-rated robot vacuum, preferring Samsung Electronics Co. Ltd.’s (KR:005930) PowerBot, priced at about $1,000.

“IRobot’s Roomba line tends to rise to the top in our tests,” Consumer Reports did note, while rating the Roomba 880, priced at $600, No. 2 behind Samsung in its buying guide of robotic vacuums, which includes 3 Roomba models out of 17.

Competition is just one of the factors that has led to questions about iRobot’s valuation, which has pushed toward $3 billion and has the stock trading at nearly 40 times next year’s earnings estimates. That has led to plenty of bets against it as well: Based on short seller data as of July 31, there is a 13.3% short position in the stock, meaning that about 13% of the company’s investors are betting it will fall.

One of those apparently betting against the stock is Spruce Point Capital Management LLC, which describes its founder Ben Axler as an activist short seller. The company put out an updated report on iRobot in which it recommended a “strong sell” in June.

“Spruce Point believes the financial improvement reflects temporary factors and may not be sustainable. We expect new competition to storm the market, and challenge iRobot’s U.S. market share dominance,” the short seller wrote. The firm, which did not respond to requests for comment on iRobot, believes the company faces serious competition from a private company in its own Massachusetts backyard, now called SharkNinja.

Charlie Vaida, an iRobot spokesman, said that the company hasn’t seen any product yet from SharkNinja. “We…can’t speculate as to what or when they might launch,” he said in an email.

Even without the possibility of a SharkNinja, the company already has a lot of rivalry from many large companies with expertise in consumer appliances, but not robotics. Analysts on its last earnings call asked about competition in China and other lower-end rivals.

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The company could use its trove of more than 1,000 patents to defend its position against that competition. iRobot has filed a suit with the International Trade Commission against multiple vacuum cleaner companies, including Hoover Inc., a unit of Techtronic Industries Co. (TTNDY) Stanley Black and Decker (SWK) subsidiary Black and Decker, Bobsweep USA and other companies infringing on its patents.

Another issue is the notion that iRobot is a one-trick pony, only faring well with the Roomba. Last year, it launched the Braava jet mopping robot for kitchens, bathrooms and other small areas. In 2014, it came out with the Scooba, which it no longer makes, and it still sells a pool cleaning bot it launched in 2013 called the Mirra. In its earnings, iRobot said the Roomba is the driver of overall revenue growth this year. In the second quarter, iRobot sold 638,000 Roomba vacuums and 110,000 mopping products. Vaida would not comment on any other products iRobot has in store.

The company’s purchases of some of its distributors also raised the eyebrows of Spruce Point. Last month, iRobot said it was acquiring its largest European distributor, Robopolis for $114 million. In April, it closed on a deal to buy its Japanese distributor for $18 million. It still has 5 or 6 other distributors that make up the remaining 45% of its European Middle Eastern and Africa region.

There have been companies in the past in many different industries that have boosted sales simply by acquiring their distributors, and Valeant Pharmaceuticals International Inc. (VRX) recently ran into serious trouble because of its relationship with a distributor. Angle told analysts that the company wanted to be in more control and to have better brand consistency in its distribution channel.

“Generically, one has to be on the lookout for companies looking to bump up their sales merely through buying their distributors,” said Rose of Battle Road. “One could argue that is just a way of increasing sales,” but he noted that in iRobot’s case, “it’s a good strategic move.”

iRobot is not a widely followed stock on Wall Street, and according to FactSet, six out of seven analysts rate iRobot a hold, with one unidentified brokage firm rating the stock a sell. Most analysts said they were too busy with earnings to speak about the stock, but Piper Jaffray analyst Troy Jensen wrote in a note in late April that he maintained a neutral rating.

“We believe investors will find it difficult to experience meaningful stock appreciation from current levels,” he said.

So investors are in a conundrum. Do they take a step back from iRobot on valuation concerns, and fears that the run-up is over? Or do they have to have faith in the scenario that Roomba will become the center of the smart home and allow the vacuum to map out users’ homes and share that data?

Those important questions show it’s still not quite clear that the mysterious ride of iRobot is worth the price. After 15 years on the market, the improved Roomba vacuums still seems to have issues finding their way, and the stock could be just as unpredictable.

Therese Poletti is a senior columnist for MarketWatch in San Francisco. Follow her on Twitter @tpoletti.

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