Spruce Point Capital Management wants to alert our readers it has re-established a short position in iRobot Corporation (Nasdaq: IRBT) as a result of our industry research that suggests SharkNinja and Ecovacs, two widely successful companies in vacuums and robotics may enter the market as earlier as Q4. In addition, we have new evidence to suggest financial irregularities tied to iRobot’s acquisition of its Japanese related-party distributor.
Executive Summary
Spruce Point Has Re-Initiated A Short Position in iRobot (IRBT) and Sees 20%-50% Downside
In May 2014, Spruce Point made its first short recommendation of iRobot, noting fundamental struggles, signs of channel stuffing, bad governance practices, and failures to penetrate the Chinese market. For the following 2 years, iRobot’s share price languished and significantly underperformed the Nasdaq technology index.
A majority of our criticisms and forecasts proved accurate.
With iRobot’s share price up 300% since 2016, investors are cheering the re-acceleration of sales and earnings growth following years of disappointment, and ascribing a peak valuation to plateauing earnings. 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 US market share dominance.
- iRobot’s recent financial performance reflects restocking of its supply chain after years of false starts, the removal of the struggling military business, and the acquisition boost from its Japanese distributor. We believe these factors will create very difficult comparisons for iRobot Corporation to lap in the future, and create headwinds for future share price appreciation.
- Furthermore, we believe recent gains are a result of lowering the price of its Roomba to move down market, which we believe is a long-term negative on margins for a technology hardware company with a narrow product focus
- Investors are overlooking disruptive competition likely to enter iRobot’s US market. Based on Spruce Point field research, we expect SharkNinja to launch a competing product at lower price points. SharkNinja outsold Dyson to claim market share in traditional vacuums. We believe they will partner with Ecovacs, the leader in the Chinese/Asia market which stole significant market share from iRobot. SharkNinja has a proven track record of disrupting numerous home appliance markets with dynamic market strategies, and superior products. With 88% US market share, iRobot’s share can only go down from here
- Investors are overlooking financial control issues tied to iRobot’s recent acquisition of its Japanese distributor. The
- Company suspiciously retracted certain statements made about Japanese sales growth (reversing big gains to declines), and made revenue and earnings revisions which don’t add up. Spruce Point has previously pointed out early warning signs at Sabre and Caesarstone, both which made related-party distributor acquisitions ahead of extreme financial revisions. Market observers will note that Valeant’s attempt to buy Philidor was another canary in the coal mine
- iRobot is trading at a peak valuation and 30% above its average analyst price target of $77. Many of its long-term fundamental investors have been selling, while retail and index funds buy. Insiders also have been heavy sellers before its recent share price increase. Its valuation dwarfs best of breed technology consumer companies such as Apple. If
- iRobot were to trade closer to peers and its long-term valuation at 3x – 4x book value and 1.5x – 2.5x sales, we could see 20% – 50% downside risk
Timeline of Recent iRobot Events
In May 2014, Spruce Point made its first short recommendation in iRobot Corporation, noting fundamental struggles, signs of channel stuffing, bad governance practices, and failures to penetrate the Chinese market. For the following 2 years, iRobot’s share price languished and significantly underperformed the Nasdaq technology index
Since the time of our report, the following developments have occurred:
- 2014-2015: iRobot misses revenue and earnings expectations multiple times after our report’s warning
- April 2015: iRobot attracts the attention of another activist investment firm who wagers a proxy fight, criticizing the company’s poor capital allocation and governance
- Feb 2016: Under pressure, iRobot sells its struggling defense and security business and has received just $23m in cash; the Company expands its share repurchase program by $100m
- March 2016: Repurchases $85m of its $100m through an accelerated share repurchase
- Oct 2016: Raises guidance for second time, backs view of 15% consumer revenue growth
- Nov 2016: Pursues inorganic growth by acquiring its Japanese distributor Sales on Demand Corp for ~$18m
- Feb 2017: Offers 2017 guidance of 17-19% revenue growth, but EPS to a wide range of -9% to +11%; restates earnings transcript to correct gross mischaracterization of Japanese performance +20% to -17%
- April 2017: Raises top end of 2017 revenue and EPS range by just $5m and 0.05c, respectively. Revises Japanese distributor contribution. After years of promoting the value of its intellectual property, iRobot finally filed ITC Patent infringement complaint against robotic vacuum cleaner products sold by Bissell, Hoover and Black and Decker covering 6 patents
Many of Spruce Point’s IRBT Criticisms In 2014 Have Proven Accurate
Who is SharkNinja and Why We Believe They Pose A Serious Threat To iRobot Corporation
SharkNinja, headquarted in Newton MA fifteen miles from iRobot, is an innovative consumer home appliance company that has disrupted markets it enters with high performance products, at affordable price points.
SharkNinja is a leader in vacuums and blenders, and targets consumers through infomercials. Based on our research, we believe they will enter the robotic vacuum market and challenge iRobot
From an article by Forbes entitled “How Shark Ate Dyson’s Lunch In America” – Dec 2014
- Formerly known as Euro-Pro, a 100-year old company that had a mere 1% of vacuum cleaner sales in 2008, SharkNinja now controls more than 20% of the US market
- Over the past seven years, its Shark vacuum cleaners and Ninja blenders and food processors, all manufactured in China, have increased sales at a compound annual growth rate of 25%, enabling the firm to triple its workforce from 250 to 800 employees
- This growth has been aided by an aggressive push on television shopping channels, with $130m spent on TV advertising last year (examples: 1, 2, 3)
- The Company has doubled revenues from $800 million to more than $1.6 billion and usurped Dyson as leader of the US vacuum cleaner market since bringing in consultants Gap International two years ago
Channel checks show Shark Ninja already has key distribution partners: Home Depot, Bed Bath and Beyond, Target, Wal-Mart, Costco, Best Buy and Many More
- These key distribution outlets overlap with many of iRobot’s existing distribution partners
- In addition, SharkNinja is known for its extensive infomercials and television advertising. The Forbes article says it spent $130m on TV advertising, whereas iRobot Corporation spent just $64.4m on advertising in 2016 (not all TV)
Shark Ninja Recently Hired Goldman Sachs To Evaluate A Sale According To Reuters (April 2017)
- Sources suggest that private equity firms have expressed the most interest in SharkNinja
- Given that PE firms are financially motivated to grow their investments to achieve 15%+ p.a. returns, a financial buyer would be incentivized to grow SharkNinja through product and market expansion
Article by Spruce Point Capital Management
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