Emerging profits often begin with some kind of surprise: a shift in consumer trends, a large investment from a bigger company or the passage of a key piece of legislation.
Of course, on the flip side, a negative surprise like a weak quarter, an economic slowdown or a tariff on its products can spell disaster.
So, when judging a company in the public eye, smart investors need to weigh what upcoming catalysts like these will do for the stock.
Fortunately, iRobot Corp. (NASDAQ: IRBT) is in a perfect position.
What seemed like a fad a few years ago has turned into a highly profitable industry. Robotic vacuum cleaners (RVCs) like the Roomba are actually still in high demand.
iRobot, which owns that brand and 52% of the overall market, saw sales jump 43% in its most recent quarter.
Despite this, investors have abandoned the stock. Since it released its third quarter earnings, shares have dropped from $96 to just $77, as I write.
They are still up on the year. But since many see the company’s growing sales dependent on the boom in stay-at-home workers buying these products, investors are discounting for the future.
This could end up becoming a huge mistake for them… and an opportunity for you.
Bears Are Out in Force
It’s true that RVCs are unlikely to become as important as smartphones. But that doesn’t mean iRobot has to be as successful as Apple to make investors money.
Still, if you look at how this one is priced, you can see that the market is emphasizing its headwinds going forward. So, let’s look at those headwinds.
The bears’ case for iRobot is two-fold.
First, tariffs. During the last few years, the Trump Administration has put heavy tariffs on products made in China. iRobot makes its popular RVCs in China.
However, the company’s products were temporarily exempted from these tariffs until the end of this year. The fear is that this exemption won’t be extended into 2021, placing a huge burden on the company’s profit margin.
Second, iRobot’s prices are quite a bit higher than its competitors’. With dozens of knockoffs on the market, investors fear that this will eat into iRobot’s 52% market share.
This is why the company’s stock hasn’t resembled some of the other COVID-19 tech booms out there. And if investors are right, these two problems will drastically slow growth going forward.
But as I said, surprises can make or break an emerging profit opportunity. In this case, the negative potential catalysts are already priced into IRBT shares. There are, however, several positive surprises that could send those shares skyrocketing.
Bulls Will Wake Back Up
The bullish case for iRobot is quite a bit stronger than investors are currently considering.
For instance, those tariffs that could eat into margins next year? They are only temporary if they happen at all.
It’s too early to say that the company won’t get another extension on its products’ exclusion. But even if that doesn’t happen, iRobot is already moving production to Malaysia from China.
By early 2022, the vast majority of the manufacturing of RVCs will be outside of the tariff zone.
And what about the premium prices? The results should speak for themselves.
This year, when millions of people have been forced to spend more time in their homes than ever before, they have decided to do it right.
I’ve already talked about how certain premium office equipment makers are taking off right now. The same is true for premium RVCs.
iRobot’s $500-plus products saw 86% year over year growth during its most recent quarter. Meaning, its premium category is actually outselling its cheaper products, which compete with the knockoffs on Amazon.
That’s not likely to change as much as investors think. With 52% of the global market for RVCs, iRobot is actually the Apple of the industry. And people are clearly paying for that.
What’s more, the company has other irons in the fire. It has developed an even larger market share on things like robotic mops and coding robots. The mops thing is obvious. But the company’s educational robots could be a whole new playing field for profits.
It has other avenues to continue growing too. It is a large investor in other startups.
Its iRobot Ventures group works just like Google’s R&D business. It finds interesting emerging technology companies and invests in them.
In return, iRobot is rewarded with new intellectual properties on top of profits when one hits. The company has already had success in ventures like 6 River Systems and Labrador.
These all represent huge upside surprises. That’s the point.
All of the negative catalysts are already priced well into IRBT shares. The company trades at a huge discount to where it should.
The positive catalysts, as you can see, remain out there. If any one of them triggers, like say tariffs are dropped for 2021, this stock is set to explode higher.
Again, the company doesn’t need to truly be like Apple to make investors money. And with how everything is lined up for iRobot, that money is coming soon.
Joshua M. Belanger
Joshua Belanger is founder of CounterVest and the editor of Hot Money Trader. He has been providing ordinary investors blockbuster returns since 2008. In 2018, the average return of Hot Money Trader beat the markets by over 15%
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