The robots are coming, and that is a good thing for iRobot (NASDAQ:IRBT). The household robotics company behind the Roomba and Braava reported a robust a double-beat-and-raise quarter recently, and iRobot stock is soaring as a result.
Revenues came in 3% ahead of expectations, thanks to strong global growth trends. Earnings were double the consensus estimate, mostly thanks to strong margin expansion. And the guide was lifted, due to strong Q2 results and yet another record sell-out showing on Amazon (NASDAQ:AMZN) Prime Day.
aBecause of all that, iRobot stock shot up more than 20% to the mid-$80’s.
Can the rally continue?
I think so. I don’t see huge gains left in 2018. But, over the next several years, iRobot stock can and will head higher thanks to multiple secular growth drivers.
Here’s a deeper look.
Second Quarter Earnings Were a Home Run
At its core, iRobot’s second quarter earnings report was nothing short of spectacular.
Revenue growth was 24% year-over-year, led by 34% international sales growth and 15% domestic sales growth. That is slower than last quarter, but also still robust considering tougher laps, bigger scale, and lack of holiday sales drivers.
During the holidays which Q2 did have, Mother’s Day and Father’s Day, management said that iRobot sales in the U.S. were robust.
Moreover, the company had yet another record showing on Amazon Prime Day, selling out inventory and doubling sales volume from the prior year.
Prime Day has historically been an indicator of back-half sales trends of iRobot. Consequently, management has hiked the bottom end of its full-year revenue guide, and is calling for 20-22% revenue growth this year.
Beyond the top-line, iRobot continues to defy the odds and report higher and higher gross margins. Gross margins came in at 52.1% in the quarter, up 300 basis points year-over-year.
This robust gross margin expansion is happening despite an influx of lower price, lower quality product in the robotics vacuum market.
Clearly, then, the narrative at iRobot remains promising. The robotics vacuum space remains a secular growth market with a long runway ahead of it.
iRobot continues to dominate that market, despite rising competition, and dominate it at healthy price points. The net result is that the company’s revenues and margins are powering higher at a rapid rate.
iRobot Stock Has Multi-Year Upside
The best thing about iRobot is that the stock is supported by much more than just robotic vacuum cleaners.
Right now, the growth narrative is all about Roomba. But, Braava, the company’s mopping robot, saw sales increase 50% year-over-year in Q2.
Braava sales have taken a backseat to Roomba as the company has invested big in Roomba marketing. Now, management is pivoting to increase awareness for Braava, and that should lend itself to multiple big growth years ahead.
There is also Mirra, the company’s pool cleaning robot, which has even lower awareness. Over time, that awareness will increase as management pumps money into Mirra marketing. That, too, will lead to multiple big growth years.
Moreover, the company is planning on launching new products in the back-half of this year. No one knows exactly what they will be. But the rumors range from a robotic lawnmower to a robotic window cleaner.
In grand total, iRobot isn’t a pure play on robotic vacuum cleaners. It is a pure play on all household robotics. This space is nascent at the moment, and oozing with hyper-growth potential. Consequently, as the leader in this space, iRobot is presently nascent and oozing with hyper-growth potential.
Considering the company’s multiple secular growth drivers, I identify iRobot as a 20% growth company with healthy margin expansion potential.
That should lead the company to doing about $6 in earnings per share in 5 years. A growth-average 20X multiple on that implies a four-year forward price target for iRobot stock of roughly $120, and a year-end price target of just over $90.
Bottom Line on iRobot Stock
Thanks to multiple secular growth drivers through the household robotics space, iRobot stock is a long-term winner. I think the stock has already done most of its work in 2018 ($90 price target), but also feel that upside is healthy and promising in a multi-year window.
As of this writing, Luke Lango was long IRBT.