Shares of robotic vacuum maker iRobot Corporation (NASDAQ:IRBT) have had a bumpy ride over the past two years. IRBT stock went from over $100-per-share in 2017 to below $60-per-share at the beginning of this year — and with the stock trading at just below $80-per-share today, investors are wondering whether another jump above $100 is on the cards this year.
Mixed views on IRBT’s future have kept the stock from making a solid comeback so far this year, but the company’s strong revenue growth certainly makes a case for picking up shares. That begs the question — at this level, is iRobot stock a buy?
As fellow InvestorPlace Contributor Luke Lango pointed out, iRobot’s near 30% revenue growth last quarter and expectations for strong profit growth in the coming quarters support a buy-case for IRBT stock. Earlier this year, IRBT spent big-time on developing new products, which hurt the firm’s share price, but those investments are about to start paying off if demand for robotic vacuums continues to rise.
According to Morningstar, Robotic vacuums make up almost 20% of the global market for vacuums over $200 — a sizable jump from the 9% they accounted for back in 2009. Luckily for iRobot, its Roomba vacuum is a market leader and its brand name has become synonymous with robotic vacuums in the US. Now, the company is pushing a new Roomba 980 that is able to map out floor plans in order to deliver a better experience for users.
The Trouble With iRobot
Right now, we’re seeing healthy demand for robotic vacuums as consumer robotics gain traction, but I’m not convinced that there are heaps of demand for robotic vacuums in the future. Looking back at demand growth, we’ve seen just about a 10% rise in demand for robotic vacuums over the course of a decade — that’s a pretty slow burn. If you think robotic vacuums will eventually replace their traditional counterparts, or at least equal them in popularity, then iRobot stock would be a good long-term bet. However, I just don’t see the robotic vacuum market growing rapidly over the next five years.
Another factor to consider is iRobot’s lack of success outside the vacuum space. The firm made a push into wet-floor care and also other household appliances like a robotic lawn-mower, but none of those products ever caught on. Of course, as homes become more automated, consumer robotics will have a better chance of gaining traction. But for the foreseeable future, it looks like there is very little interest in robotic appliances.
That leaves vacuums as iRobot’s only avenue for growth over the next few years, and with a niche product that’s relatively expensive I’m not convinced that robust growth can be expected — especially if there’s an economic downturn. The fact is that although demand for robotic vacuums has been healthy in recent years, it’s elastic making it an uncertain bet for the future.
An Uninspiring Choice
Lango sees revenue growth between 15% and 20% over the next few years, but I think those expectations are lofty. If consumer robotics do gain the kind of attention that iRobot is hoping over the next few years, you can be sure that competitors will be cropping up. Right now iRobot has the dominant market share in the U.S., but in China its position is much more precarious.
A lot of iRobot’s success against competitors will depend on its patent protections — some of which will be expiring in 2019. It’s worth considering that the firm is unlikely to remain alone at the top of the field forever, especially if robotic vacuums start to take off. Right now, even though Roomba is well-recognized, the firm’s moat is completely dependent on patents.
Looking at the share price now, I’d say that iRobot is fairly valued with little upside left. It’s possible that the stock could stretch toward $90 before the year is over, but anything above that is unlikely. If you bought during IRBT’s slump earlier this year, you might want to consider taking profits if the stock starts heading toward $90, but as far as long-term bets go, I think there are far better options out there with more exciting growth opportunities.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
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