iRobot ($IRBT), A Missed Opportunity
If you’re new here, I am a fan of the Coffee Can Portfolio, an “Active Passive” approach to investing. The idea of a Coffee Can is simple: Buy a basket of the best stocks you can and let them sit for years. You incur no costs with such a portfolio, and it is simple to manage.
Results To Date of My Latest Coffee Can:
Both KWEB and KIND have had good runs recently, both up almost 20% over the past month.
We’re still at 4 investments; one more to go in this Coffee Can.
Every now and then, you come across a potentially good investment opportunity, but fail at pulling the trigger. This recently happened to me with IRobot. So I wanted to jot down some thoughts so I can keep an eye out for a similar investment pattern in the future.
Pattern Matching can be an important component of developing an investment thesis.
Some Background First:
In 2006, my roommate had bought a Roomba for our 2 bedroom apartment. Every Friday evening when I went out, I would turn it on, and by the time I returned home, it would have vacuumed everywhere. I particularly liked that it would vacuum under my bed. That was cool! In fact, I’d say that the first time it was a magical experience.
However, one thing we found pretty annoying was the frequency with which we had to remove the dust it picked up. It would get full very fast, and ultimately, my roommate decided to return it because of this.
But based on that experience, I always thought the Roomba was a pretty cool product. However, for some reason, I never did purchase one of my own.
A few years ago, I started hearing about how low cost robot vacuum cleaners were taking share away from Roomba. It seemed that the Roomba brand power wasn’t strong enough to withstand the pricing pressure. Or at least that was my perception. In 2021, we visited some friends for the first time, and I noticed they had a Roomba! When I asked them why they bought that one, they simply said “I had heard of the brand, Roomba’s are supposed to be of good quality, so I didn’t really research any others”. Clearly, at least in that instance, I had been wrong about the brand perception.
Short-Circuiting The Buying Process
You see there are four stages to the consumer buying decision process:
Need recognition
Information and alternatives search
Evaluation of alternatives
Purchase decision
A good brand conveys the message that a company has a long history of providing high-quality products and services. As a result, a strong brand can cause buyers to short circuit the above buying process. It isn’t uncommon for buyers to completely avoid the mental overload of researching and evaluating alternatives, and simply buy the brand they’re most familiar with, or have the most affinity towards. This is exactly what my friends did.
Why is that important? Well, that means a brand is worth something.
And sometimes public company market valuations can get lower than what their brands are worth. I believe this happened with the Roomba brand.
If you recall, Amazon had made a bid to purchase IRobot. However, in January earlier this year, the stock lost more than a quarter of its value on a report that said that the Amazon deal faced an EU block. The stock was trading at roughly a $500 million market cap after this drop. However, I noticed that the iRobot chair and CEO Colin Angle, who co-founded the company in 1990, was stepping down. This was a turn off. A few months later, I noticed that the stock had come down significantly more, and was now trading at only ~$200 million market cap.
I thought the Roomba brand was likely worth somewhere in that ball park, so I wanted to take a closer look at the company. But I ended up deciding to look into Nextdoor first (because I believe Nextdoor could in fact be a Maverick).
Well, today, I saw that IRobot (IRBT) stock was up nearly 20%...and the market cap has become almost $400 million. That’s almost a double in less than a month!
I missed it.
I guess you win some, and you lose some.
So What’s the Investment Pattern?
When Company Valuation < Brand Value, you can think of buying the brand for less than its worth, and also getting the operating business for free!
Of course you still need to decide whether you want to own the operating business.
Are There Any Stocks that Fit This Pattern Today?
I think Nextdoor ($KIND) may be one.
And perhaps GoPro (GPRO)? Taking a very quick look at Yahoo Finance, we see GPRO has net cash of roughly ~$130 Million, and a market cap of $250 Million, giving it an enterprise value of just $120 million. Could the GoPro brand be worth that much? Doesn’t seem farfetched…
ChatGPT agrees (albeit, low billions seems excessive):
Questions:
What other companies do you think fit this pattern?
Do you know any good resources to estimate brand value?
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I’d love to speak with you if you have a passion for investing and if you’re looking to build your first Coffee Can, your very own Portfolio of Mavericks, or simply want to get my thoughts on your portfolio.