Last week, Amazon (NASDAQ: AMZN) announced it would be purchasing Roomba maker iRobot (NASDAQ: IRBT) for $1.7 billion, or $61 per share.
Some may have taken the acquisition news as a mere value investment by Amazon's savvy management team, as the acquisition price, while 20% higher than the pre-announcement share price, is still 75% below iRobot's all-time high.
However, there's more to just the iRobot purchase than a good value, as Amazon's next big innovation may very well come in robotics.
Getting a steal?
iRobot is currently facing difficult headwinds. In its second-quarter report, released in conjunction with the acquisition announcement, iRobot reported revenue down 30% from a year ago, with operating losses ballooning to $63.9 million, from a $3 million loss in the year-ago quarter. The company is suffering from a stay-at-home demand hangover, higher costs, and a decrease in customer purchasing power from inflation.
However, iRobot's Roomba vacuum is still a loved product. As recently as 2020, the company generated a $146.3 million operating profit. So Amazon is only buying the company for 11.6 times its 2020 operating profit. While that year was no doubt fueled by the stay-at-home boom, iRobot had still been a growth company -- and a profitable one at that -- in the years leading up to the pandemic.
However, iRobot totally mismanaged its cash position. Just one year ago, the company had $415.8 million in cash -- flash forward to today, and it has just $63.4 million, and that's in spite of taking out $35 million from its revolving line of credit!
Where did the money go? Two things: First, management spent huge amounts on inventory over the past year, perhaps thinking the boom times of the pandemic would continue. In the recent quarter, days of inventory ballooned to 210 days, nearly double the 112 days of inventory last year.
Not only that, but iRobot also blew $150 million on share buybacks last year, committing the all-too-common sin of management teams repurchasing shares when times are good and the stock price is high, only to deplete the cash reserves and leave the company vulnerable to a downturn.
In fact, Amazon's purchase price is well below the level where management was gobbling up shares last year. iRobot spent $50 million on buybacks in the second quarter of 2021 at an average price of $112, and then another $100 million at an average price of $83. Remember, Amazon just bought the company for $61.
That's terrible for iRobot shareholders, but it sure looks like a great vulture investment by Amazon.
But iRobot could be more than just a value grab
Aside from the iRobot's Roomba vacuum, Braava mop, and Aeris air purifier products, Amazon is no doubt bringing on some top-notch robotics expertise. iRobot was founded in 1990, introduced the first Roomba vacuum in 2002, and spent more than $161 million in research and development last year alone.
However, Amazon has also been investing heavily in robotics itself, and in several different fields. For consumer applications, Amazon just introduced its own home robot called Amazon Astro in September 2021. Astro doesn't clean your house as Roombas do but rather has applications in home security, communication, entertainment, and transport. Perhaps cleaning features could be added to Astro, making a home super-robot.
Amazon has been aiming for a complete automated smart home offering, acquiring home security company Ring, smart doorbell company Blink, and home Wi-Fi company Eero over the past several years. Even the Alexa smart assistant was developed as the result of an acquisition back in 1999. Beyond regular smart homes, Amazon recently announced its Alexa Together service on the recent earnings release, meant to help seniors live independently while being monitored by caregivers remotely. Certainly, robots could play a big role in this service. When combined with Astro, iRobot's products could round out these offerings nicely.
Robots are ascendant across Amazon's business
Amazon is also increasingly using robots to streamline and automate its vast e-commerce and fulfillment operations, speeding deliveries and improving safety for employees.
In its recent earnings release, Amazon pointed to several robot products used in its warehouses, including Proteus (carrying packages across a warehouse while avoiding employees), Cardinal (a robotic workcell that lifts and turns large and heavy objects and completes complex packaging tasks), Amazon Robotics Identification (artificial intelligence-powered scanning), and a Containerized Storage System (delivering packages to employees without them having to bend down, climb ladders, or reach up). On the delivery side, robots are also gaining prominence, as Amazon just announced it has begun its first deliveries-by-drones in the markets of Lockeford, California, and College Station, Texas.
In fact, Amazon is so into robotics it announced a $1 billion Industrial Innovation Fund in April, aimed at funding start-ups in robotics, fulfillment, logistics, and supply chain innovation. Finally, last year Amazon selected Lunar Outpost as one of 10 start-ups in the AWS Space Accelerator program. Lunar Outpost makes autonomous robots meant to travel to untraveled parts of the moon, such as the lunar South Pole.
Like Whole Foods, this could be the start of something more
The iRobot acquisition reminds me a lot of Amazon's Whole Foods acquisition back in 2017. At the time, Amazon also had a grocery delivery business, but it hadn't really caught on in a big way. Meanwhile, Whole Foods was struggling after years of success.
While the acquisition was made at very reasonable valuation, giving Amazon Whole Foods' profit stream, the acquisition also provided Amazon with much-needed know-how of the grocery business, which it has parlayed into its own lower-cost, high-tech Amazon-branded stores called Amazon Fresh. Grocery products have been on the rise for Amazon, no doubt helped by demand from the pandemic, but also in part because of what it's learned from the Whole Foods acquisition.
So not only does Amazon look like it's buying iRobot at a bargain price, but the acquisition could also bring in iRobot's engineers and robotics expertise -- which could lead to even more interesting futuristic breakthroughs down the road.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Billy Duberstein has positions in Amazon. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Amazon and iRobot. The Motley Fool has a disclosure policy.
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