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2020.05.17 Penn Wealth Report Vol 8 Issue 03

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12 penn wealth Report voluMe 8 issue 03 17 May 2020 Penn Wealth Report Copyright 2020. All Rights Reserved. investMent intelligence iRobot Corp Robotics & AI e content of this report reflects the personal views, opinions, and research of Penn Wealth Publishing. While measures are taken to help assure the accuracy of data, no guaran- tees can be made and the firm is not liable for any losses incurred by subscribers. is is not a solicitation to buy. Always consult your investment professional before investing any money. One of our favorite Saturday morning cartoon reruns growing up was e Jetsons. With automated helpers and robotic "friends" attentively serving our every need with alacrity, the future—at least through the eyes of George Jetson and his family— looked bright. Today, nearly sixty years after that show was first produced, a semblance of many of those robotic workers are actu- ally on the drawing boards of upstart firms, just waiting to come to life. Meanwhile, one robotics firm has already sold 25 million functioning units to households around the world. Founded in 1990 by technologist Colin Angle and two other members of MIT's Artificial Intelligence Lab, iRobot (IRBT $42-$48-$133) is a thriving small-cap con- sumer robotics firm with annual revenues in excess of $1 billion—a figure that has grown every year for the past decade. Remarkably, at least for a company in this R&D-centric industry, it has remained profitable for each of the last ten years, and carries very lit- tle debt on its books. It boasts a multiple of just fifteen, which makes it sound more like a consumer staples company than a cut- ting-edge robotics maker. e company's most well-known prod- ucts are the Roomba® Robot Vacuums and the Braava® Robot Mops, but Angle, who is something of an eccentric mad scien- tist, is not resting on his laurels. e Root® Coding Robot is an educational robot that teaches coding and problem-solving to kids from grade school through high school. Jam packed with lessons, projects, and hands-on activities, the company is making a strong push to get this device—which comes with a subscription service (think recurring rev- enue)—in the hands of as many educators as possible. As for outdoor devices, iRobot makes the Mirra™ Pool Cleaning Robot, and most recently introduced the Terra® Robot Mower. e latter not only mows on a pre-set sched- ule, it scans the yard to miss the flower beds! Management's vision for the future. In listening to or reading over some of Angle's recent interviews, one word that seems to come up time and time again is "network." While he sees a virtually limit- less number of functions for our household robotic friends, his concern is the lack of integration, or a single network allowing these devices to work in unison. at sounds a lot like something a Steve Jobs might say, and it gives us some clues into where he is taking the company. Considering the great success that Apple, for instance, has had in locking millions of people into its ecosystem, it makes sense that an integrated home automation system could be a boon to the robotics company which masters it. While Apple, Google, and Amazon are all making plays in home auto- mation, none are making robotic devices akin to those coming from iRobot. Or, per- haps one of these tech giants will decide to pay an enormous premium to acquire IRBT. Either one of these scenarios would be good news for investors. Diversifying away from China. Like too many other companies, iRobot became dependent upon their Chinese man- ufacturing facilities for the overwhelming percentage of finished product. Without a doubt, one of the main reasons IRBT shares are trading about 65% off their highs has to do with the supply chain being short-cir- cuited by supply chain issues. While management should have never allowed this condition to exist, it is taking steps to ameliorate the problem by open- ing new facilities in countries outside of China. e company's Malaysian factory, for instance, is now churning out close to 1,000 units per month of the Roomba, and that number should continue to grow. We opened IRBT in the Penn New Frontier Fund at $48.80 with a price target of $73, but hitting that level is only the first stop in what we expect to come. One company is actually building the robotic workforce we envisioned as kids. Considering the great success that Apple has had in lock- ing millions of people into its ecosystem, it makes sense that an integrated home automation system could be a boon to the robotics company which masters it. IRBT @ $48

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