As a child I loved watching The Jetsons, a cartoon about a futuristic American family who lived in a utopia of sophisticated robots that would do all the household chores. Thirty-five years on, these dreams are becoming a reality thanks to the inventors at iRobot. The group was set up in 1990 to develop androids with artificial intelligence. So far they’ve sold more than three million devices that can vacuum and wash floors, clean gutters and swimming pools – all without any human intervention. These products can not only manoeuvre around obstacles on their own, but also recognise when they are running low on power and automatically troop off by themselves to be recharged.
Gamble of the week: iRobot Corp (Nasdaq:IRBT)
The firm possesses a 90% share of this nascent “home-helper android” market (excluding toys), which is expected to become an $18bn sector over the next decade. Along with this huge consumer opportunity, there is also strong demand from the military, who use their robots to detonate bombs in Iraq and Afghanistan. iRobot has already sold more than 1,500 such devices, yet this could be just the tip of the iceberg. Congress has mandated that by 2015, one-third of all military ground, air and underwater vehicles should be unmanned.
There is also a pipeline bursting with new inventions including unmanned sea-gliders used for underwater surveillance; stealth robots that are so soft, flexible and mobile that they can identify and move through openings smaller than their own dimensions; and advanced communication androids that allow parents to socially interact with their children from remote locations.
On the financials, top-line growth has been outstanding, with sales booming from $54m in 2003 to $249m in 2007, representing a compound average growth rate of 46%. And after a period of substantial investment, the company is set to become profitable in the second half, generating 2008 underlying earnings per share of around 15 cents on revenues of $300m, rising to 42 cents and $348m in 2009. The balance sheet is also strong with net funds of $22m as at the end of March.
Fine so far, but what are the dangers? Well, competition is hotting up from the likes of small start-ups, domestic appliance makers (eg, Dyson) and industry giants – albeit iRobot has already protected its technology with around 145 patents. Also, as with most hi-tech areas, there are risks of product obsolescence, while in the event of a severe recession, growth may well slow.
All the same, iRobot offers the more adventurous investor a chance to benefit from the long-term adoption of service and social androids in everyday life. Nobody knows how big the company could eventually become, but let’s assume its turnover hits $1bn in 2012, along with achieving operating margins of 15%. As a result it would deliver underlying earnings per share of about $4 per share. Using an implied discount rate of 14% and a prudent 12 times earnings, that would generate a ballpark value for the stock in today’s terms of about $25 to $30 per share. Second-quarter results for 2008 are due out in around two weeks.
Recommendation: SPECULATIVE BUY at $13.26 (market cap $327m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments