Household consumer robotics leader iRobot (NASDAQ:IRBT) has seen its stock bounce a lot recently. IRBT stock had a big rally in 2016-17, when the stock soared from $25 to over $100. But ever since mid-2017, investors have started to weigh a rich valuation against still-robust growth numbers and IRBT stock has ultimately just skidded sideways, with a few big drops and a few big rallies in there.
Right now, IRBT stock is in the middle of one of those big rallies. A bad fiscal 2018 earnings guide, due to big investments into new products, sent IRBT stock spiraling in early February 2018 to below $60. But sentiment has since reversed course, as investors have chosen to focus on the still-robust top-line growth narrative — with expectations for robust profit growth to follow in the future. Consequently, IRBT stock has rallied from below $60 to above $80 today.
What is next for this volatile stock?
There could be some bumpiness in the road here, as the stock is closing in on fair value. But, overall, the growth narrative remains promising, sales trends remain positive, and IRBT stock should be able to head higher into the end of the year.
Here’s a deeper look.
What the Analysts Are Saying About iRobot Stock
A few analysts have chimed in on IRBT stock over the past few weeks, and they can’t seem to agree on where the stock will head next.
Raymond James recently downgraded IRBT stock on valuation and competition concerns. Meanwhile, Piper Jaffray recently said that their mid-quarter channel checks showed that iRobot’s numbers are trending ahead of expectations.
Who is most correct here? I’d have to side with Piper Jaffray.
As far as the Raymond note is concerned, I really don’t see the valuation and competition concerns. IRBT stock trades at 30 times forward earnings. That is a big multiple, but it makes sense to next to ~30% revenue growth last quarter and a solid growth narrative that has broad exposure to the household consumer robotics revolution. At worst, you can make the argument that IRBT stock is fairly valued. But overvalued to the point of a downgrade? I don’t see it.
As for the competition concerns, I also don’t see it. Competition was supposed to show up to the IRBT party back in mid-2017 when SharkNinja was making big moves into the robotic vacuum space. That forced Spruce Point Capital to put out a really bearish note on IRBT stock.
But since then, iRobot’s revenue growth has accelerated and gross margins have actually trended higher. So where is this competition? Wherever it is, it isn’t showing up in the numbers — and that is all that matters.
Meanwhile, with respect to the Piper Jaffray note, it does look like iRobot’s awareness continues to grow both in the U.S. and globally. Domestic and international search trends related to both iRobot and the company’s core product, Roomba, remain healthy. So long as these search interest tends remain healthy, then iRobot awareness is growing, and bigger sales should follow suit.
Where iRobot Stock Could Be by the End of the Year
Overall, the robust growth narrative supporting IRBT stock as the leader in a rapidly growing household consumer robotics market remains as strong as ever.
That being said, I don’t think IRBT stock has huge gains ahead of it here. Valuation isn’t a problem, but IRBT stock is rapidly approaching fair value, implying that the era of outsized gains may be coming to a close.
My best guess is that this is a 15-20% revenue-growth company over the next several years, as consumer robotics awareness grows and the company launches new products. Margins should trend higher due to operating leverage, and I’m realistically targeting operating margins of 12% in 5 years (management is calling for operating margins north of 10% in 3 years). Under those modeling assumptions, I think that IRBT can do about $5.95 in earnings per share in 5 years.
A growth average 20 forward multiple on that implies a four-year forward price target of $119. Discounted back by 10% per year, that equates to a year-end price target for IRBT stock of just under $90.
Thus, while I think IRBT stock can — and will — head higher into the end of the year, I also think that the majority of the stock’s 2018 run has already happened.
Bottom Line on IRBT Stock
This is a volatile growth stock which traders should buy on big dips and sell on big rallies. I was a buyer below $60. And while I’m not a seller just yet, I also think that, if this stock closes in on $90 soon, I will sell during that rally.
As of this writing, Luke Lango was long IRBT.
