Amazon’s Home Robots Show Great Promise

In their unending bid to keep pushing the envelope, Amazon (NASDAQ:AMZN) is working on its home robot, known as “Vesta,” which may be announced in the next few quarters. Bloomberg has mentioned that Vesta is expected to be about waist high and have an array of cameras and the ability to respond to vocal commands, much like Amazon’s Echo devices. 

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It should be noted that Amazon has made huge investments to automate its warehouses. This has allowed the company to learn useful skills in A.I. and robotics.

Amazon has announced the opening of a new Robotics Innovation Hub in Westborough, Massachusetts. Home robotics can be the next big segment for Amazon after its market leadership in smart speaker category. The future performance of Amazon stock depends heavily on successful diversification by the company as its cloud segment shows new challenges.

There are several useful applications for these home robots. Last year, Alibaba (NYSE:BABA) announced the launch of service robots in the hospitality sector. These robots can deliver meals, take laundry and complete many other mundane jobs. It is likely that Amazon will also follow a similar trajectory in the development and installation of these robots in different industries.

Amazon is building new AI system within home robots which will ask questions from users to improve their functionality. This is a huge segment that can open up new growth opportunities for the company and improve the growth potential of Amazon stock. At the same time, Amazon has a natural moat in this segment due to its massive use of robotics within the warehouses.

When Are Home Robots Coming?

There were rumors in 2018 that Amazon was rapidly moving ahead with the development of its home robot product. A launch was expected in September 2019, but that date came and went with no product launch. Amazon has invested heavily in automating its warehouses, including tasks like sorting and moving packages and inventory. These robotic skills are very useful during the development of a robot for many other commercial purposes as well as home robots. 

There is already a big pushback against Big Tech. The justice department is looking to probe major tech companies, including Amazon. We have also seen a lot of sci-fi movies which have vilified robots. Hence, Amazon would obviously be moving slowly within this segment and using the utmost caution. 

The growth of this segment will probably coincide with the development in the autonomous transportation segment. As the regulators and general public show greater acceptance for autonomous vehicles, we should see a greater interest in other kinds of robots. 

Market Size and Moat

At one point Echo smart speakers were believed to be redundant gadgets with very limited growth potential. However, Amazon has not only been successful in the massive growth of this segment, but it has also managed to retain a market leadership position despite several new entrants. Two key strategies which helped Amazon in driving Echo sales were rock-bottom prices and close integration with Amazon ecosystem. This improved the value proposition of these devices.

We can see a similar strategy with Vesta. Amazon can make this a must-have gadget in every home by closely linking the various skills of Vesta within its ecosystem. It is difficult to gauge the true market potential of these robots, but we can get a good estimate from some of the niche players in this industry. For example, iRobot’s (NASDAQ:IRBT) highly successful Roomba has allowed the company to report revenue of more than $1 billion in 2018. Its stock has a market cap of over $2.5 billion. 

Amazon has a big advantage in this field. It already uses computer vision and advanced automation within its warehouses. A number of companies are entering the smart speaker segment to gain a slice of this lucrative market. However, it would be difficult to build a similar skillset within robotics. Amazon has a natural moat in this segment due to its expertise. 

Amazon Needs to Diversify

Amazon has made several attempts to gain a strong position in the consumer electronic segment. Many attempts have failed, but with the success of Echo and Alexa, Amazon is in a position to gain good market share in new segments. At the same time, the core e-commerce segment of the company is slowing down which is dragging down the overall revenue growth. Hence, it is very important for Amazon to deliver successful products in segments like home robotics.  

The growth in Amazon stock for the past few quarters has been due to the rapid growth of AWS. However, the recent quarter showed significant slowdown in growth and also a decrease in operating margin. The year-on-year operating income grew by only 6%, excluding F/X, while the operating margin dropped by six percentage points compared to year-ago quarter.

The future growth potential of Amazon stock will depend on the ability of the company to diversify into other high margin segments. Amazon is already focusing on consumer electronics with Echo and other devices announced in September 2019. Home robots should help in increasing the diversification process by the company.

Amazon can take a significant market share in commercial robotic products as well as home-based products. This is a very huge market which should help Amazon move the needle in its already massive revenue base. 

Investor Takeaway

Amazon is developing a home robot called “Vesta” which should have a number of useful skills and should be closely integrated within Amazon’s ecosystem. Amazon’s Alexa is very popular and the advanced A.I., computer vision and other skills required within a home robot will reduce the competitive field in this segment. Alibaba has already made partnerships to provide robotic solutions with companies in the hospitality sector. We can see a similar approach by Amazon in the next few quarters.

As of this writing, Rohit Chhatwal did not hold a position in any of the aforementioned securities. 

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