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.

XPONENTIAL 2018 – The State of The Drone Industry

Last week, we attended the AUVSI XPONENTIAL trade show in Denver, the largest global gathering of unmanned systems providers, robotic software developers, and industry experts. We spent time with 15 executives from some of the leading commercial drone companies and thought leaders in the space and, as we did last year, asked them a set of six questions to better understand the trends driving (and holding back) the commercial drone industry.

Similar to last year, the executives we surveyed believed regulatory policies remain the biggest headwind holding back the industry while challenges related to sense-and-avoid and battery endurance are the biggest technical challenges. In addition, the industry is still in need of an Unmanned Traffic Management (UTM) system to unlock the true potential of drones, but the timeline to commercial integration remains uncertain. While we left the conference believing it will likely take longer for the drone market to reach its full potential as we work through these headwinds, we came away incrementally more upbeat about the long-term market opportunity for drones: The drone market will be a multi-billion dollar industry opportunity that benefits both early-stage start-ups as well as multi-billion dollar tech companies.

Below is additional color on the responses to our six survey questions:

What’s the biggest limitation holding back the industry? Almost identical to the responses we heard at least year’s conference, the majority of drone executives highlighted regulation as the primary industry headwind. While favorable drone regulation has been introduced over the past few years, the industry needs more clarity on beyond-visual-line-of-sight (BVLOS) flights, as well as flights over populated areas. Product understanding, technological hurdles, such as battery life, and lack of understanding around aircraft certification requirements were also common answers.

What U.S. government regulation is holding back the commercial drone industry the most? The key regulation holding back the industry is around beyond-visual-line-of-sight (BVLOS) flights, which was indicated by seven executives. This compares to five in last year’s survey (also 15 participants). Pushback on Section 336, which limits the FAA from regulating hobbyists, was also identified as a piece of legislation causing the industry headaches.

When will flights beyond visual line of sight be broadly allowed with US government oversight? Almost everyone agrees that BVLOS flights will not be made commonly permissible in the next year or two. On average, most experts think the industry will see broad BLVOS allowance in 2020, which was in-line with last year’s result. That said, there is some early progress on BLVOS flight. PrecisionHawk announced the first Beyond Visual Line of Sight (BVLOS)-enabled drone platform at the conference. After 3 years of research, the company was able to develop an FAA-approved drone system to operate BVLOS. While the industry still has a ways to go for broad BVLOS flight deployment, this announcement marks a major step forward.

When will a UTM system go live in the US? An Unmanned Traffic Management system is critical to allowing routine BVLOS flight applications and key to enabling the true potential of drones. NASA, Amazon, Google, and a handful of start-ups are leading the initiative to build various UTM systems. We asked when the executives in our survey expect a UTM system to be commercially available in the US, and unfortunately, most were pessimistic about this occurring in the next 12 months. The majority expect UTM to be integrated between 2020 and 2022. However, once again we heard several people indicate they are unsure, and implementation is largely in the FAAs hands. For a deep dive into UTM, see our research note here.

What is the biggest technical challenge you need to solve? While drone tech has advanced significantly over the last 12 months, industry leaders identified several areas that need improvement. Those specifically identified were remote identification, sense-and-avoid in GPS denied environments, battery endurance, real-time data processing, and command-and-control communication links. The executives in the survey went on to highlight that many of these technologies also need to be certified to be used in advanced applications.

What is the biggest untapped market or use case for drones? The drone market is still far from being mature, and most executives still see the largest market opportunities in traditional industries such as agriculture, utility inspection, and security. However, once BVLOS flights are allowed regularly, drone delivery and air taxis are also seen as large market opportunities, although don’t expect to see either of those use cases broadly deployed in the next several years.

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.

How To Think About Recent Volatility in Tech

Market decline does not change the mega growth opportunities. The heart rate of the market increased the past week because of fears of a trade war, Facebook data privacy, and broken market technicals, but the health of the market is unchanged and the health is good. Core underlying tech trends including artificial intelligence, robotics, big data, and autonomous transportation, will support continued growth.

Hold tech for the long-term. We believe that tech is essentially taking over the rest of the economy; therefore, investors should hold tech long term. Just as every company is now an internet company to some degree, we believe that eventually every company will be an AI company.

Market undervalued. From a valuation perspective, our view is undervalued. The market has rallied back to the old highs, but the S&P is up only 3% per year over the past 17 years, compared to the previous 17 years (1983-2000) when it was up 17% per year.

Putting the size of tech into perspective. The tech sector’s growing clout is not just a U.S. story. Tech stocks have become so dominant in emerging markets that for the first time since 2004, the industry last year overtook finance as the biggest sector in the MSCI Emerging Markets Index. Tech had a 28% weighting near the end of 2017, more than double its level six years ago, according to data provided by MSCI. Facebook, Amazon, Netflix Inc. and Alphabet together account for a 7.8% weighting in the S&P 500, more than double from five years ago.

Company Updates:

Tesla. We remain positive on TSLA. Shares are down 20% in the past month mostly due to fears of another miss in Model 3 production. The recent stock dive is due to a combination of a Model X accident that is being investigated, Waymo’s partnership with Jaguar, which legitimizes a key competitor (the I-Pace electric SUV), growing concern among all companies testing self-driving vehicles amid the Uber fatality, and news that Moody’s has downgraded Tesla’s bonds to B3 from B2, citing significant shortfall in the Model 3 production rate and a tight financial situation. We continue to believe the Tesla story has the best risk-reward among tech companies over the next 5 years.

  • Model 3 production. We’re expecting another miss in Model 3 production in the March quarter but that does not change the story. There is more demand than supply for the Model 3 (about 400k preorders which is unheard of in automotive). It might take a year, but eventually, Tesla will get the Model 3 production right, and ramp output.
  • Model X accident. We see the recent Model X accident the same as accidents with gas cars. It is unlikely that the battery or Tesla’s advanced cruise control “autopilot” were to blame. Tesla disclosed that the autopilot feature properly functions 200 times a day on the same stretch of road where the accident happened.

Facebook. Limited upside to FB. Given the privacy issues, for the first-time advertisers have to think about Facebook as a liability. Separately, it’s unclear about how the recent privacy changes will impact Facebook’s ability to make money.

Nvidia. We remain positive on NVDA. Shares of NVDA dropped 11% in the past week following the announcement that they temporarily stopped autonomous testing, and in part because of the broader market sell off. While the company did not comment on timing, we expect testing to resume in the next 3 months. The big picture is the company is well positioned to capitalize on four mega trends, AI, autonomous cars, gaming, and blockchain through their dominance of GPU processors.

Apple. We remain positive on AAPL. Concern is emerging that iPhone demand in June will fall below Street expectations. We think iPhone demand over the next two quarters is not important to the story. What’s important is the share buyback, services, and the next iPhone.

  • Share buyback. Apple can add 4% per year to the stock price (assuming they use $40B of the $55B they generate in cash each year to buy back stock). Apple will give an update on the share buyback when they report the March quarter, likely late in April.
  • Bigger screen iPhone this fall. We expect Apple will announce a 25% bigger phone in the fall. This will be a positive for unit demand and average selling price.
  • Services. Services account for about 15% of revenue and are growing at 15-20% year over year. We believe this segment will continue to grow at a 15% or better rate over the next five years. This is important because the earnings multiple on shares of AAPL will likely increase as investors view the predictability of services are more attractive.

Google. We remain positive on GOOG. We expect the next six months to be rough for shares of GOOG as questions emerge about how the company uses data. Despite that negative potential, Google is too tightly woven into the fabric of the internet. The company is one of the best ways to invest in AI, given the company has a stated their intention to move from a mobile-first company to an AI-first company over the next several years. Lastly, the company has a stake in Waymo, the leading autonomous car company. We expect years of positive news to come from Waymo.

Amazon. We remain positive on AMZN. The company is best positioned for the future of retail. We see that future as a combination of both online and offline retail. Online sales account for about 15% of global retail, and in the future, we believe it will eventually reach 55% of sales. We also expect Amazon to do more with physical retail locations and we continue to believe the company will eventually acquire Target (TGT). The company’s AWS web hosting business is only 15% of revenue, but it is growing at greater than 30% for the next several years.

Twitter. Limited upside to TWTR. About 14% of Twitters 2017 revenue came from selling data, growing at 18% y/y, compared to Twitter’s ad business that declined by 6%. Selling private data is a toxic label, and this could limit the upside to shares over the next year.

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.