This Company Made Profits From Robots
Peter Thiel is a co-founder of PayPal, Palantir Technologies and Founders Fund. His net worth of $2.6 billion was created almost entirely from investments in technology companies. He definitely understands tech and consumer needs and he marries the two.
Another company that does well at combining what is possible with what is profitable is a company that makes robots. Although Thiel famously said, “we were supposed to have flying cars by now” he might have said, “We were supposed to have flying cars by now but people are happy with robots that clean their home.”
iRobot Scores Again
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The maker of Roomba cleaning robots reported record fourth-quarter adjusted earnings of 84 cents per share, well above Zacks Consensus Estimate of 51 cents. This compares to 54 cents in the the same period the prior year.
Fourth-quarter revenue increased 17.7% vs. the comparable period, to $384.7 million, above the consensus estimate of $379 million — a record high for the company.
“We had a phenomenal finish to 2018, exceeding both our fourth-quarter and full-year expectations for revenue growth and profitability after raising our expectations twice during the year,” iRobot Chairman and CEO Colin Angle said in a press release.
Angle said the consumer robot company successfully navigated the impact of tariffs in the United States.
The company’s full-year 2018 adjusted earnings grew a whopping 60.5% from the prior year, to $2.84 a share, with revenue rising 24% to $1.09 billion vs. $883.9 million recorded in 2017.
iRobot generated $71.7 million cash from operating activities in 2018, down from $76.3 million the prior year.
The company said the beat is owed to strong holiday demand in the U.S. and Japan.
“Substantial demand for our game-changing Roomba i7 and i7+ robots drove strong holiday performance domestically,” said Angle. “Overseas, overperformance in Japan was driven by robust fourth-quarter demand supported by our sales and marketing programs in that region.”
iRobot said it expects stronger demand to continue to drive up revenue in 2019 despite tariff uncertainties. The company expects revenue growth of 17% to 20%, between $1.28 billion and $1.31 billion, and EPS between $3 and 3.25 in 2019.
The company said it will diversify its products further in 2019, introducing a lawn-mowing line of robots and expanding into the smart-home space.
The stock could be positioned to break out of a trading range that defined the price action for the past few months.
A Trade for Short Term Bulls
As with the ownership of any stock, buying IRBT could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for IRBT
Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For IRBT, the March 15 options allow a trader to gain exposure to the stock.
A March 15 $115 call option can be bought for about $6.50 and the March 15 $120 call could be sold for about $4.10. This trade would cost $2.40 to open, or $240 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $240.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in IRBT the maximum gain is $2.60 ($120 – $115 = $5; $5 – $2.40 = $2.60). This represents $260 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $150 to open this trade.
That is a potential gain of about 108% in IRBT based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.