Summary
- Based on the execution of iRobot's growth map in DTC ahead of product expansion, there is ample room for prolonged growth at the top as profitability metrics remain fairly stable.
- While there is definitely a medium-term upside based on current performance metrics, the real upside comes from the strong customer engagement ecosystem that the company is building out.
- The short interest is definitely of concern, but long-term investors can be confident that the strong fundamentals will eventually overcome any worries about the stock staying at depressed levels.
iRobot Corporation (IRBT) had a blow-out Q3-20, reporting better-than-expected revenue growth of 43% despite Prime Day moving from July to October this year. Although Q4-20 expectations are filled with cautious optimism, as is the case with many retail companies, guidance figures point to the company reporting sustained growth in Q4-20 and a strong finish to FY-20 overall.
Thesis: Based on the execution of iRobot's growth map in DTC ahead of product expansion, there is ample room for prolonged growth at the top as profitability metrics remain fairly stable. While there is definitely a medium-term upside based on current performance metrics, the real upside comes from the strong customer engagement ecosystem that the company is building out. It is this ecosystem that will deliver strong growth well into the future.
Q3-20 Review
Stellar numbers were reported all-round at the Q3 earnings call. Revenue grew in strong double digits, as we saw, with the U.S. market reporting 75% revenue growth, followed by EMEA at 22% and Japan at 12%, all over the prior period. Of significance is the fact that online sales now make up 60% of overall revenues, having grown by 70% between Q3-19 and Q3-20. Roomba sales accounted for nearly 90% of the mix, while the Braava line was driven by M6 sales and grew by 38% overall.
On the profitability front, gross margin was positively impacted by forex and the channel mix shift to e-commerce, as well as other one-time events like the timing of supply chain activities and, of course, higher revenues. The company reported a 48% non-GAAP gross profit rate. Operating expenses were up 18% due to short-term incentive compensation and additional investments toward DTC and revenue growth support. The company now expects to report an operating profit margin of 9% for FY-20, with a low single-digit margin projected for Q4-20.
The company reported non-GAAP earnings of $2.58, which beat analyst estimates by $1.58 for a 159% surprise and marks over 20 consecutive quarters of beating earnings estimates.
Despite beating estimates on EPS as well as revenue (by $98.5 million), the stock declined by about 15% after the earnings release. A plausible reason for the decline is that the stock witnessed a strong +25% surge ahead of Q3-20 earnings and, as a result, a significant portion of investors will have booked their profits at that level.
A further decline was seen after Pfizer (PFE) reported that an external panel of experts found that the vaccine candidate developed by itself and BioNTech was "more than 90 percent effective in preventing the disease among trial volunteers who had no evidence of prior coronavirus infection." While the broader market rallied on the positive news on November 9, iRobot stock took a dive once again, the assumption being that the market sees a 'returning to work' trend as a negative indicator for iRobot products. I believe that's highly unsubstantiated at this point. We're not going to be seeing the vaccine come out for at least a few months, and even then the initial run will only be about 20 to 30 million units, per Pfizer. It's going to be at least another year before everyone is vaccinated and even longer before the fear of COVID-19 is wiped out from the collective public memory.
