iRobot Corporation Stock Will Keep Rebounding Because the Robots Are Coming

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IRBT stock - iRobot Corporation Stock Will Keep Rebounding Because the Robots Are Coming

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Home robotics leader iRobot Corporation (NASDAQ:IRBT) was on fire in 2017. IRBT stock ran up from $60 at the beginning of the year to nearly $110 by July. Robotic vacuum cleaners were starting to go mainstream, and IRBT stock was winning as a result.

But then competition arrived. Namely, dominant traditional vacuum company SharkNinja started to aggressively enter the robot vacuum space in mid-2017. Given that SharkNinja ate Dyson’s lunch in the traditional vacuum space, investors freaked out that they would do the same to iRobot in the robot vacuum space.

IRBT stock fell big time from $110 in July to $65 in early December.

But IRBT stock is starting to show some signs of life recently round the holiday season. It’s up 11% so far in December, versus a 1% gain for both the NASDAQ 100 and S&P 500. Naturally, the December strength makes me think that IRBT is having a pretty good holiday season.

My research corroborates this.

Moreover, a strong holiday season means more than just super-charged numbers for this quarter. It means that the upward trend in home-robotics adoption (and the IRBT growth narrative) is intact, regardless of competitive headwinds. As investors begin to realize that IRBT is surviving competition, sentiment will normalize, and IRBT stock will rebound.

iRobot and the Big Holiday Season

Shopping is going digital. That means that most shopping trips these days start with a Google search. Consequently, the best way to get a read on what is selling well during the holiday season is to consult with Google Trends.

Google Trends shows that search interest related to all things iRobot surged this holiday season.

Search interest related to “iRobot” and “Roomba” (iRobot’s robot vacuum) surged to all-time highs during Thanksgiving weekend this year. Same with search interest related to “Braava” (iRobot’s robot mop). Overall, search interest in November and through the first two weeks of December has surged 30% higher year-over-year for “iRobot,” 35% higher for “Roomba” and 66% higher for “Braava.”

Why the big growth? Because the robots are coming.

Just look at the five-year search interest chart for “vacuum robot.” It becomes clear that the trend in home-robotics adoption is only accelerating. Not only is search interest spiking, but growth in search interest is accelerating, too. Search interest in November and through the first two weeks of December related to “vacuum robot” rose 88% YOY this year, versus 33% growth last year.

Clearly, growth in the whole market is picking up.

IRBT’s big growth numbers in-line with market growth speak to the fact that the company is not getting squeezed out by competition. Rather, IRBT is growing with the market. That means competition concerns are overblown.

But competition concerns are the biggest reason why IRBT stock is more than 30% off its 2017 highs.

As these competition concerns ease, IRBT stock could soar higher.

How Much Higher Can IRBT Stock Go?

Let’s take a look at the numbers.

The global robotic vacuum market has grown roughly 18% per year since 2012. Those big growth rates are expected to stay and maybe even accelerate to 20-25% over the next several years. Given strong search interest trends this year, it looks likely that this space does indeed grow at an accelerated pace into the foreseeable future.

IRBT is the leader in this secular growth market, with somewhere around 60% market share. IRBT has also successfully defended that market share position despite elevated competition.

Consequently, IRBT revenue growth has remained solidly above 20%. Considering the huge market growth prospects, all iRobot has to do to maintain that 20%-plus revenue growth rate is maintain market share. IRBT is already doing this in the face of big competition. I do not see any reason why this will change in the future.

Gross margins should expand as the market moves toward more premium sales. Operating margins should expand even more as expense leverage kicks in with big revenue growth. Overall, 20%-plus revenue growth should drive 30%-plus earnings growth.

The Street is modeling for roughly 37% revenue growth over the next two years. Let’s be conservative and call it 30%. The S&P 500 is trading at a 90% premium to its growth (20x this year’s earnings for 10.5% annualized earnings growth over the next two years).

IRBT stock easily deserves this 90% premium given huge growth in out-years. That implies a “fair” price-to-earnings multiple of 57. A 57x multiple on this year’s $1.82 earnings estimate implies a fair value of over $100.

Bottom Line on IRBT Stock

Huge consumer interest in home robotics products and specifically iRobot products this holiday season implies that the IRBT growth narrative remains intact.

With that growth narrative intact, competition concerns should ease. As those concerns fade, IRBT stock could head back to its 2017 highs of over $100 rather quickly.

In other words, this rebound in IRBT stock is just the beginning of a far bigger rally.

As of this writing, Luke Lango was long IRBT. 


Article printed from InvestorPlace Media, https://investorplace.com/2017/12/irobot-stock-will-keep-rebounding-because-robots-are-coming/.

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