Robots Are Coming, and This Company Is Delivering
Peter Thiel is one of the most successful venture capitalists in the world. He cofounded the VC firm, Founders Fund, which profited from a number of big wins including Facebook and PayPal. But, he might be most famous for a paper he wrote that was titled, “What Happened To The Future?”
In the paper, Thiel raises a number of interesting points. He points out that over the past few years, the pace of transportation has slowed, for what he says is the first time in history.
One example is that with the retirement of the Concorde, for the first time in human history time to cross the Atlantic went up, not down.
Another example is that travel time via airlines has gone up in recent years because of government security regulations. Thiel notes that it also costs more and more to get a drug approved, because of regulation.
While it’s an important read, it’s probably most known for the subtitle which is, “We wanted flying cars, instead we got 140 characters.”
Thiel is right. Sixty years ago, dreams of flying cars and robots were real. We do have robots now, but they are not the type from 1950s and 1960s television shows. They are less dramatic and likely to complete a single task.
Instead of Robots That Talk, We Do Have Robots That Clean
iRobot (Nasdaq: IRBT) is the leading global consumer robot company, designs and builds robots that empower people to do more both inside and outside of the home.
iRobot created the home robot cleaning category with the introduction of its Roomba Vacuuming Robot in 2002. Today, iRobot is a global enterprise that has sold more than 20 million robots worldwide.
iRobot’s product line, including the Roomba and the Braava family of mopping robots, feature proprietary technologies and advanced concepts in cleaning, mapping and navigation. iRobot’s engineers are building an ecosystem of robots and technologies to enable the smart home.
The company also makes robots for cleaning pools. This isn’t the Jetsons, but it is a profitable business. IRBT is also working to boost its business. According to analysts,
“Stronger demand for home-robotic products like Roomba, Scooba, Braava has been boosting iRobot’s revenues for the past few quarters. The company’s revenues improved 3.3% in 2016, while the same increased 10.9% in 2017. Notably, in first-quarter 2018, the company’s top line improved 28.8% year over year, backed by double-digit revenue growth secured from all end-markets.
In order to increase household adoption rates of Roomba and Braava products, iRobot is investing in several marketing programs. Notably, the company is currently promoting Braava products to its U.S. Roomba customers via television advertisements. These commercials aided in bolstering the company’s U.S. Braava revenues by nearly 35% year over year in the first quarter.
Also, the $141-million Robopolis acquisition (July 2017) will likely augment the market penetration rate of iRobot’s robotic vacuum cleaners in Europe.
iRobot currently anticipates revenues of $1.05-$1.08 billion in 2018, estimating an annualized growth rate of 19-22%.”
The stock, which has been a laggard for the past year, appears to be rebounding.
It’s likely, based on the chart, that IRBT should continue rising. An upcoming earnings report will be important but there are also short term trading opportunities with limited risk that could be used while waiting for earnings.
Trading the Trend
When a stock is expected to move higher or pull back slightly, traders could consider obtaining long term exposure to the stock to profit. A number of options strategies could be used to meet this objective.
Among those strategies is a bull put spread. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.
Source: The Options Industry Council
This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.
Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.
Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.
A Specific Trade for IRBT
For IRBT, a bull put spread could be opened with the July 20 put options. This trade can be opened by selling the July 20 $76 put option for about $2.30 and buying the July 20 $74 put for about $1.90.
This trade would result in a credit of $0.40, or $40 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.
The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $2 ($76 – $74). This is multiplied by 100 since each contract covers 100 shares.
Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $160 ($200 – $40).
The potential gain is about 25% of the amount of capital risked. This trade will be for about two weeks and the annualized rate of return provides a significant gain.
The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.
These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.