Why Amazon Will Sell Robots into the Home

  • Bloomberg reported on April 23rd that Amazon was working on a home robot, but specific use cases of the robot were unclear.
  • Based on what we know about Amazon’s commerce strategy, filed patents, product speculation, and competitive landscape we believe Amazon’s robot would have a bigger vision than helping clean floors.
  • We expect Amazon to release a home robot in 2020, which will be centered around Alexa.
  • Initial use case will likely include a movable digital assistant used for home monitoring and entertainment, but longer-term, the robot could further help Amazon understand consumer brand preference, improve consumer replenishment, and perform autonomous package deliveries.

Source: Mayfield Robotics

On April 23rd, Bloomberg reported Amazon was working on a home robot. According to this article, the project is known as Vesta and is being developed in the company’s Lab126 hardware division, which is responsible for building the Amazon Echo. Bloomberg said Amazon is hoping employees can test the robot in their homes by end of 2018, with a launch possibly in 2019. However, Amazon has not commented on the speculation, and the Bloomberg piece highlighted there is still a lot of uncertainty around what the specific use cases of the robot will be.

We expect Amazon to release a home robot in 2020, and are encouraged they are entering the home robotics space because of the market opportunity it represents. Based on Amazon’s commerce strategy, filed patents, product speculation, and the competitive landscape, we believe Amazon’s purpose of releasing a home robot includes a bigger vision than helping consumers with household chores.

What will the Amazon robot do? We believe Amazon’s robot will be built around Alexa, given its AI and human interface capabilities available today. The initial applications will likely include a movable digital assistant used for home monitoring. However, it is likely that Amazon’s ambition in the home robotics space is grander and more strategic than building a mobile Alexa. Placing a robot that will incorporate advanced computer vision and mobility systems will allow Amazon to create a 3D map of a home. By maintaining a 3D map, this means Amazon (pending privacy restrictions) could know what type of products are in your house and monitor usage rates of household products. This could further help Amazon understand consumer brand preference, and allow consumers to better replenish goods when they need them, as well as pursue new product opportunities such as furniture, home appliances, etc.

In addition, Amazon’s robot could open up new market opportunities. According to The Information, Amazon has considered offering home insurance. By having real-time monitoring of homes, the Amazon robot could monitor and notify a human in instances of theft, fire, or in-home hazards (i.e. an infant wondering near stairs), thereby mitigating the cost of a claim and lowering premiums. Lastly, Amazon has highlighted they want to deliver packages to your home when you are not there. We feel consumers would be more comfortable letting couriers into their homes if a robot could monitor the drop-off. Further, as crazy as this sounds, Amazon could eventually have these robots leave the house and go pick up packages for consumers from delivery trucks or fulfillment centers. This approach is based on an Amazon patent (here) filed last year introducing a concept where a robot retrieves items from transportation vehicles for delivery to specified locations. These robots may be owned by individual users and/or may serve a group of users in a given area.

Source: United States Patent Office

Why not release a robotic vacuum or mop? Given the lack of public information on this initiative, there’s a chance that Amazon does, in fact, release a robotic vacuum and mop, because that market is still nascent and has measurable growth potential over the next decade. We think this is less likely given the robotic vacuum and mop market is already competitive (lead by iRobot, Neato, and Samsung), and does not line up with Amazon’s mission of taking friction out of commerce.

Domestic robot market. In 2017, there were 6M robots sold globally, up 24% from the prior year, and the total market value grew 23% y/y to $1.7B. By 2025, we estimate that over 26M domestic units will be delivered, representing a 21% 10-year (2015 – 2025) CAGR and a market reaching $5.7B.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

iRobot’s Results Indicate Home Automation Becoming Mainstream Theme

iRobot, the leader in home robotics, reported impressive Mar-18  results, reiterated full-year revenue guidance, and modestly increased full-year EPS expectations. Heading into the quarter, we were optimistic demand was tracking ahead of expectations due to strong pricing trends throughout the quarter (see note here), but we were encouraged to hear Management’s commentary around continued strength despite investor fears of increased competition. iRobot reported Mar-18 quarter revenues of $217M, which is up 29% year/year and exceeded Street expectations by ~$3M. Demand in the quarter was driven by Roomba, with units and revenues increasing, 22% and 33% respectively. Following the strong quarter, we believe the transition to home automation is moving quickly, and see iRobot as a key player for years to come.

Home automation becoming mainstream theme. Largely due to increased consumer awareness, the domestic robot market has been one of the fastest growing robotic categories over the last several years and iRobot has taken full advantage. This marks the 5th quarter iRobot experienced 20%+ year/year revenue growth, and the company is on pace to see 20%+ growth for the second consecutive year. iRobot has invested a lot in sales and marketing initiatives, which has driven consumer awareness for the whole industry and benefited the company’s P&L materially. With only ~10% U.S. households and ~2 – 3% international homes owning a robotic vacuum cleaner, the domestic robot market and iRobot has more room to run.

iRobot’s premium robot niche tough to beat. Although a portion of rising ASPs was due to the company’s recent acquisition, we also believe it has to do with strong demand for iRobot’s higher-end Roomba products. The 900 Roomba series has been one of the company’s best selling products since being released, and the company has established itself as the clear leader in this category. While increased competition from traditional brands and new Chinese companies remains a risk and key topic, most of these companies are releasing lower-end products and have yet to threaten iRobot’s higher-end dominance. Given iRobot’s 20+ years of robotic expertise, and strong brand recognition we see it as challenging for these new brands to bring a superior high-end product to market. However, if a company does release a competitive high-end product, we view this market as growing fast enough where more than one company can flourish.

What to think of Amazon? Amazon was the latest to make some noise in the consumer robotic space when multiple reports had indicated the company is working on bringing a home robot to market. However, note this report was not confirmed by Amazon and many questions are still to be answered if they will be a direct competitor to iRobot. Until more information is released, we do not see it has a real threat today. However, assuming they want to release a vacuum or wet floor product, most will view this announcement as a negative. That said, iRobot finds it as a positive because it brings further validation and market awareness to the space. Also it should not be assumed Amazon will come in and dominate this market. Because, as multiple Fortune 500 companies have already found, making a fully functional robot is much harder than it seems.

Model Revisions. Given the company reiterated full-year revenue and operating income guidance, we have left our model mostly unchanged. See model here and here.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

iRobot Pricing Trends Suggest Demand for Roombas Has Not Slowed

iRobot is the leading manufacturer of robotic vacuums and wet floor products in the world. Based on a modest quarter/quarter improvement in pricing trends, we believe the company experienced another strong quarter of demand for Roomba and Braava products and likely sold more robots than expected in the Mar-18 quarter. In addition, we believe the domestic robot market is one of the fastest growing robotic segments, and given iRobot’s positioning and premium tech, we expect the company to sustain 20%+ revenue growth for the next several years. While increased competition has been a growing threat to iRobot’s market share in recent quarters, we believe these threats are overblown and that the company is in position to flourish for years to come. The company reports Mar-18 quarter results on Tuesday, April 24th after-markets-close.

Strong pricing trends across entire portfolio. Over the last 3 years, we have tracked iRobot pricing across the company’s 4 largest US distributors (Best Buy, Amazon, Bed Bath & Beyond, and Target) on every Friday in the quarter. While pricing is not a perfect indicator of demand trends, price discounting has historically had a solid correlation with iRobot’s quarterly results. As displayed in the chart below, the company experienced on average higher pricing across all products we track (Roomba 980, Roomba 960, Roomba 614 Braava 380T and Braava Jet) in the Mar-18 quarter than they did in the Dec-17 quarter. We find this encouraging because we felt pricing last holiday season was strong, which translated into the company beating Dec-17 Street revenue expectations by ~$8M (or ~3%). We do want to highlight the company missed on EPS last quarter, which heavily weighed on the stock. While it is difficult to get a read on how pricing trends will directly impact the bottom line, we do know the company has historically beaten top and bottom line expectations over the last year. Given Management ability to manage expectations, we are optimistic about the upcoming quarter.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

3 Analyst Day Takeaways on Why iRobot Will Lead for Years to Come

Following iRobot’s Analyst Day, 3 themes stood out that confirm iRobot will remain one of the leading consumer robotic companies in the world for years to come. They include extremely low household penetration rates domestically and internationally, iRobot’s multi-million unit install base, and the company’s ability to scale the technology into many other consumer robotic categories.

We have barely scratched the surface. iRobot estimates only 10% of U.S. households own a robotic vacuum cleaner, and outside the U.S., penetration rates are estimated to be considerably lower (~2-3%). However, robotic vacuum sales have been growing at a 22% CAGR since 2012, and we anticipate 20%+ growth to continue in this category through 2020 as more households adopt this technology for the first time. We believe the biggest driver to growing adoption is increasing customer awareness through increased marketing spend. Despite Wall Street criticism around the company’s initiatives to increase marketing spend, we believe devoting extra resources to sales and marketing will drive incremental revenues and profit in the long term. As displayed in the chart below, iRobot believes the immediate addressable market is 2x their current install base, and looking out further, the company believes they have barely scratched the surface.

Source: iRobot 2018 Investor Day Presentation

Growing install base an undervalued robotics asset. The company highlighted their U.S. install base is over 13M units. We view this large and growing install base as a very underappreciated asset. As a Roomba is helping the consumer clean, it is also benefiting iRobot by gathering large data sets on how the robot interacts with the world. iRobot can then use the data to train their proprietary AI algorithms and improve their robots functionality. This is akin to a self-driving car testing on public roads. iRobot’s CEO, Colin Angle, said the biggest challenge any robot has to overcome is interrupting the world. By having access to millions of robots across the world, we believe the company will continue to build the highest performing robots on the market.

iRobot is much more than a vacuum company. iRobot’s mission is to drive robot adoption among the consumer. Today, that primarily consists of Roombas and Braavs, but we believe the company is capable of scaling this technology across many types of other domestic robot categories like lawn mowers, security systems, etc. Given the many years of robotics expertise, as well as the proprietary data iRobot has access too, we expect the company to begin to enter new robotic categories in the coming years. While iRobot’s Management team did not give too much information on the company’s new product launches in 2H18, they did hint that the company could soon be expanding outside of robotic vacuums and mops.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

iRobot’s Earnings Disappointment Doesn’t Change Long-Term Story

Heading into the Q4 print we were confident iRobot would report better-than-expected revenues and guide 2018 sales above street expectations (see note here), which they did, but we incorrectly judged the magnitude lower EPS could have on the stock. Shares of iRobot finished down 30% due to investors concerns with decelerating revenue growth and lower-than-expected profitability. That said, with the revenue outlook being inline with our expectations and the lower earnings forecast being largely attributed to increased marketing and R&D spend (and not price erosion), we remain believers in the long-term iRobot story. Following iRobot’s results our two key takeaways are 1) the domestic robot market is and will remain one of the fastest growing robotic markets over the next 3 years and 2) iRobot will continue to lead the wave of home robot adoption.

20% Growth Through 2020. In addition to providing 2018 guidance that implies 20% year/year revenue growth, iRobot expects this type of growth to continue through 2020. Although investors view 20% growth as a deceleration over prior years, we view this forecast as in-line to our estimates and higher than most longer-term consensus models. Given Management’s history of providing conservative guidance, we think there is room for these numbers to go higher as we make our way throughout the year. Demand will be driven by increased Roomba and Braava sales from both domestic and international homes.

iRobot Leading Domestic Robot Wave. The company announced they will be rolling out a slate of new products in 2H18, which is expected to account for 25% of total sales. While the company did not give much detail on these new products, we anticipate they will enhance both the Roomba and Braava product portfolios. The company continues to heavily invest in R&D, and we believe the company will soon expand their core presence outside of vacuums and wet-floor products.

Link to model here.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.