Amazon is on an acquisition spree. Amazon last week added iRobot to its portfolio, making it Amazon’s second deal after it acquired OneMedical about two weeks ago. In this essay, I will talk about iRobot’s acquisition, its importance to amazon, and why it’s a win-win for both companies.
iRobot (ticker: IRBT) is being acquired in an all-cash transaction for roughly $1.7 billion, including debt. The deal works out at $61 a share and is about a 22% premium to iRobot’s closing price on Thursday.
iRobot stock surged on the news; it jumped almost 20% to $59.59 Friday morning after trading was halted earlier. Amazon.com (AMZN) was down 0.8%. The move in opposite directions shouldn’t be surprising for investors because of the premium Amazon is paying for the transaction.
What is iRobot?
iRobot is a global consumer robot company that designs and builds thoughtful robots and intelligent home innovations that make life better.
They are Roomba makers. I don’t think I need to go into too much detail about Roomba. Almost everyone has either heard of or used their robotic vacuums. BTW, they are life savers (from personal experience).
The reason they are life savers is because they save time. They do our dull and dirty job. It is super easy to use. The price is attractive. All of this provided iRobot with a good headstart compared to the competition. It went on to sell millions of these and achieved $1.5B in revenue last year.
Roomba was struggling to sell and then this ad from Pepsi used a robotic cleaner. It became the turning point for Roomba.✓
Amazon + iRobot
Amazon has been aggressive in the robotics space since its acquisition of Kiva Systems (for $775M in 2012) which is focused solely on its warehouse/fulfillment play. They tried to enter home improvement with the launch of Astro, but that robot lacked the focus of Roomba.
It debuted for $1000 last year in September. Astro is an Echo Show with a touch screen and speakers. There are challenges with Astro, and it clearly shows that it is difficult to convert a warehouse-centered robot into a home robot. Even Amazon was not able to figure out the right use of this robot, sometimes they called it an autonomous home security system. Amazon also suggested that Astro will be a good solution for offering remote care for aging people or people with disability.
With the failure of Astro, Amazon has realized they need to be partners with their customers in home improvement. There is a lot of scope in IoT for home, the industry is expected to reach $25B globally by 2025. Amazon’s ambition is to be a key player in the home. Also, any development in this space has to tie in with Amazon’s core e-commerce business and AWS.
Considering these factors, iRobot fits in perfectly. Amazon and iRobot already have had a close partnership over the past several years through Roomba’s Alexa functionality and use of AWS servers. Cheery on top, was the use of Roomba’s cameras, sensors, and AI/ML to collect an incredible amount of data.
We need to understand one thing here, the smart home of the future will not be controlled by your smartphone. If you have 100 devices, you will not be pulling out your cell phone 1000 times to operate them. There has to be a single cohesive environment that controls these smart devices. Amazon Echo + Alexa is that the environment. Google and Apple provide a similar environment with Google Home and Siri.
With Alexa available on all possible smart TVs, security systems, lights, Refrigerators, Washers, Dryers, etc. The acquisition of Roomba makes sense especially after Amazon failed to go mainstream with Astro. I am not saying it’s the technology that Amazon cannot develop, but the Roomba brand itself gives Amazon a big headstart and a lot to gain from.
Financially it makes sense to do deals in the current environment. The stocks are way off from their pandemic high and the valuations are justifiable. Amazon got a good deal with $1.7B, considering iRobot had a market cap of $4.7B during the pandemic boom.
iRobot is a positive cash flow company that has taken its revenue from $436M in 2012 to $1.56B in 2022. 90% of iRobot’s revenue comes from its Roomba products. Almost all other revenue is from the Braava line (robotic mops). iRobot has failed with other experiments to build robots for pool cleaning or lawn mowing.
Another concern for iRobot is its growing inventory. The company has 165 days of inventory at the end of Q1 2022, which is almost double that of its 10-year average of 80 days. As pandemic-fueled demand slows, inflation remains high and fear of recession increases, people will start cutting down on expenses. This will further hurt iRobot’s near-term forecasts.
iRobot has healthy gross margins in the range of 40-45% and an operating margin of 7.5%. The operating margins will take a further hit this year as transportation costs and supply chain costs have skyrocketed. iRobot is not privy to the supply chain issues and it’s evident from the last two quarterly results. Amazon can provide iRobot with the scale they need to operate and reduce supply chain constraints.
Amazon will have to focus on turning things around for iRobot which is facing very strong headwinds. There are order reductions, delays, and cancellations. iRobot is also restricting operations and cutting 140 jobs or roughly 10% of the workforce.
For Amazon, this deal is a good verdict. After failing with Astro and Kiva Systems still remaining a warehouse and fulfillment center robotics company, iRobot will provide a huge boost to entering the IoT home improvement space. The good news for amazon is an existing Alexa and AWS connection.
I do suspect the deal will face a high level of security as a lot of data is involved. Big tech including Google, Apple, and Facebook are under tough scrutiny from the regulators. Data-privacy experts and antitrust researchers quickly raised alarm, saying the tech giant could use the purchase to vacuum up personal information from inside users’ homes. This argument does not hold real value for me, what amazon needs to know about you, it already knows. Alexa and Amazon.com provide more important and valuable data to Amazon. Amazon stands to gain not much by observing how your furniture is stacked or how your living room is arranged.