At first, automated vacuum cleaners were the realm of science fiction. Decades later, retail markets finally offered these devices, but they were largely novelty items. Despite some early challenges, iRobot Corporation (NASDAQ:IRBT) maintained the course. Today, IRBT is one of the most recognized names in the “vacuum bot” industry.
How long that success will last, though, is a major question. Yes, IRBT stock has skyrocketed since the start of 2016, up 80%. That said, iRobot has experienced significant headwinds in the markets over the past year-and-a-half. From blowing past the $100 level to flirting with half that amount, shares have been incredibly volatile.
To put things into perspective, iRobot stock is up only about 3% since 2017’s opening day. In other words, investors just don’t know what to expect from this company.
Making matters worse, yesterday, Bloomberg reported that Amazon.com, Inc. (NASDAQ:AMZN) is working on a domestic robot, code-named “Vesta”. The move isn’t exactly surprising. Amazon aggressively competes in the smart-home market, taking on giants Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOGL).
That Amazon is a known disruptor didn’t ease Wall Street’s worries. The markets penalized IRBT stock swiftly, with shares closing down more than 6%. Not a great way to start its first quarter 2018 earnings report!
Things may get uglier. Amazon is already beating Apple in the smart-home sector because of its connectivity advantage with digital assistant Alexa. If Vesta works seamlessly with Alexa — why wouldn’t it? — I don’t know where that leaves IRBT.
One thing is certain: unless management comes up with a solution, or at least a believable proposal quickly, it’s lights out for iRobot stock. Can IRBT deliver?
Possibly Too Little, Too Late for IRBT stock
For Q1, Analyst consensus pegs earnings per share at 49 cents. This is near the higher end of the estimated spectrum, which ranges from 31 cents to 67 cents. Additionally, the current estimate is significantly below the 58 cent EPS that the company achieved in the year-ago quarter.
On the revenue front, analysts expect sales to fall between a range from $200 million to $222.6 million. Consensus stands at $211.4 million. In the year-ago quarter, IRBT brought in $168.5 million, which was $100,000 above the consensus estimate.
Although it appears that investors are relatively enthusiastic for iRobot, the forecasts are downgraded from actual performance metrics. For instance, revenue growth from 2016 to 2017 was nearly 32%. And from Q1 2017 against the prior-year quarter, revenue jumped nearly 29%. Thus, the forecasted 25% growth in the upcoming quarter is comparatively disappointing.
What concerns me more, though, is the net income trend. Over the past four years, net income growth averages 11%, but the individual results are choppy. In 2016, profits slipped to $41.9 million, representing a 5% decline from 2015’s haul. Moreover, in Q1 2017, we saw 346% EPS growth. For this year’s Q1, we may see a decline.
This situation may not improve anytime soon. Over the last three years, both operating and net margins have slipped significantly. Also problematic: SGA expenses are outpacing investments toward research and development. With big competitors on the horizon, I need to see more emphasis on R&D.
Which segues into another worrying point: the Q1 report may not matter. Unless iRobot scores big, IRBT stock faces significant sentiment risk. We’ve all seen what Amazon can do, and it’s not pretty for the hapless competition.
Product Risk for iRobot stock
Moving forward, a major risk factor I see for iRobot stock is the products themselves. I concede that currently, the company’s Roomba leads the robo-vacuuming industry with 60% market share. But with Amazon potentially in the mix, that’s not going to last.
Usually, a single news item doesn’t change the overall picture dramatically for a company. But when you’re talking about Amazon, standard operating procedures don’t apply. Armed with Alexa compatibility, Amazon has a far superior ecosystem. If iRobot were to compete tit-for-tat, they’d have to invest significantly in R&D.
Right now, as I alluded to earlier, they’re more concerned with keeping the lights on.
Another point is that Roombas aren’t cheap. The entry-level MSRP starts at $300, and the flagship is $900. That’s fine and dandy if the products work as advertised. However, a litany of (recent) customer complaints suggest that a growing number are very unhappy with their purchases.
That again is a dilemma; the company can dazzle all they want with charts and graphs. Perhaps in the nearer-term, IRBT stock may respond positively. But let’s not kid ourselves. Amazon is a harbinger, and that’s all that investors will be thinking about.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
