Spruce Point Capital Management wants to alert our readers about a critical update to our research on iRobot (Nasdaq: IRBT). Our latest view points can be found on our website and regular updates will be posted on Twitter.

If you recall, back in June we warned that SharkNinja was planning to enter the robotic vacuum market. SharkNinja has become the leader in the US vacuum market by out-innovating competitors such as Dyson. The story is told nicely in a Forbes article entitled “How Shark Ate Dyson’s Lunch In America”.

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Spruce Point Reiterates Strong Sell on IRBT, 20%-50% Risk Following Shark Ninja’s Ion Robot Release

SharkNinja has entered the robotic vacuum market with a “functionality at a reasonable price” strategy to compete directly with the Roomba. The RV700 series has similar, and in many cases near identical product functionality, channel distribution and marketing as the Roomba. Given Shark’s historical success, we assume that their entry into the market will translate into sales and margin pressure for iRobot beginning with Q4 2017.

Spruce Point’s June report predicted that SharkNinja would enter the US robotics market by holiday season. In fact, on 9/12/17 Shark introduced a robotic vacuum to compete directly with iRobot’s Roomba
  • Product Offering: Shark will offer three different versions of their robotic vacuums (RV750, RV720, RV700). The RV750 is WIFI-enabled with app compatibility, voice controlled through the Google Assistant and Shark Skill for Alexa, and possesses many of the same functionality as the iRobot Roomba 890. The RV720 and RV700 are remote controlled and lack voice control, but seem to carry all of the other functionality of the RV750.
  • Pricing: The RV750 has a MSRP of $350, a significant discount to the Roomba 890 and comparable to the lower functioning Roomba 690. It appears clear to Spruce Point that Shark will compete with iRobot by offering comparable functionality at a lower price point. Pricing has yet to be released on the RV720 and RV700, but we anticipate them to be at lower price points given lack of connectivity and each vacuum’s identified distribution
  • Distribution Strategy: The Shark RV series has independently aligned each of their product offerings against different brick and mortar retailers in an attempt to optimize pricing and avoid consumers trading down. Given SharkNinja’s existing dominance in the traditional vacuum space, they have already secured shelf space at 10 traditional retailers and Amazon to compete directly with the Roomba.
  • Marketing: In addition to the RV700 series looking very similar to the Roomba, Shark has also adopted an extremely similar marketing strategy to iRobot. Shark promotes the RV series features in a similar manner, uses near identical imagery and has similar taglines. The selection of the 700 series name is another astute branding tactic to attack the core Roomba 600 series offering. The timing of the Shark RV launch also positions the Company to compete directly with Roomba during the critical holiday season.

Recap of Shark and Recent Events

As discussed in our June 27th update, SharkNinja is a fierce and capable competitor. iRobot controls an estimated 88% of the US robotic vacuum market. We believe it is inevitable that iRobot will lose share and see margin compression

  • We believe SharkNinja strives to be the #1 or #2 leader in markets it enters. Based on its track record in traditional vacuums and blenders, we believe SharkNinja is a credible threat to iRobot
  • SharkNinja’s displacement of Dyson in vacuums was a result of a laser-like focus on the consumer, and its ability to engineer a superior product at a value price point. As an organization, Linkedin data shows that SharkNinja employs more engineers than sales or marketing people
  • We believe Dyson failed to gain traction with its robotic vacuum because its price point of >$1,000 was simply too high, and it did not deliver meaningful performance advantage to the Simply stated, Dyson could not offer a compelling value proposition while SharkNinja appears well positioned to do so
  • Given SharkNinja’s marketing prowess stated to be $130m annually (2014 figures), we wouldn’t be surprised to see it spend at least 10% or more of this annual budget to ensure the success of its debut robotic vacuum series

Post the release of our June 27th report highlighting the Shark risk, we note that:

  • iRobot declined to directly comment on the Shark entry risk, but instead tried to spin a positive tune:
    Other companies are realizing what iRobot has known all along — that some jobs, like vacuuming and mopping, are best suited for a robot”  (source: NY Post)
  • What will iRobot say now that it is clear that Shark is going directly against it with an offering of superior value?
  • iRobot then acquired its European distributor for an expensive price. Our August 18th report provided irrefutable evidence to suggest financial anomalies from the margins implied from iRobot’s guidance; iRobot remained silent
  • It seems clear now that Shark is entering the US market that iRobot’s distributor acquisitions appear to be defensive moves meant to temporarily deflect margin pressure
  • The only action we’ve seen is iRobot’s Director sell a meaningful % of this stock – 10,000 shares at $92.71 (form 4)

SharkNinja's Complete Product Suite

Shark’s robotic vacuum will be available at Amazon, Best Buy, Home Depot, Bed Bath and Beyond and Walmart

iRobot

A Closer Look At Shark's Core Product vs. Roomba Offerings

RV750 has the features of the Roomba 890 at the price point of the Roomba 690 In other words, in our view Shark delivers a better value to the customer at a cheaper price

iRobot

Article by Spruce Point Capital Management

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