Two Big Reasons Red-Hot iRobot Stock Needs to Cool Off

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IRBT stock - Two Big Reasons Red-Hot iRobot Stock Needs to Cool Off

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One of my favorite consumer technology stocks, iRobot (NASDAQ:IRBT), has taken off like a rocket ship ever since the company reported strong beat-and-raise quarterly results towards the end of July. Since then, IRBT stock has rallied nearly 60% to fresh all-time highs above $110. But even as a longtime bull on IRBT stock who was pounding on the table to buy the shares when they were trading at $60, I think that the rally has been excessive and that this stock needs to cool off here and now.

IRBT stock has come very far, very fast. The stock’s technicals scream “overbought” in the near-term, and the fundamentals don’t support a $110-plus price tag today. Having said that, the long-term narrative behind IRBT stock is quite robust, and this stock will see new highs over the longer term.

But because of the stock’s overstretched valuation and its massive rally over the last month, IRBT stock is due for some near-term turbulence. Expect that turbulence to cause a meaningful drop in iRobot stock. But be ready to buy any dips that bring IRBT stock back towards $90.

The Technicals of IRBT Stock Scream Overbought

IRBT stock has rallied a ton in a short amount of time, and its technicals suggest that this rally is approaching a near-term top.

The Relative Strength Index, or RSI, on iRobot stock has soared into overbought territory and has surpassed 80. An RSI of that magnitude has historically proven to be unsustainable for this stock. Normally, such periods of high RSI are followed by sizable corrections in IRBT stock.

Moreover, iRobot stock is now trading more than 30% above its 50-day moving average. That is as wide of a divergence between the 50-day moving average and the stock price that this equity has ever seen. Usually, whenever iRobot stock approaches 30% above its 50-day moving average, it forms a near-term top and then retreats significantly

Overall, the near-term technicals of this stock are bearish and largely imply that a top is forming.

Fundamentals Don’t Support $110 Price Tag

The fundamentals of IRBT are really good. This is a company that is leading the robotic vacuum cleaner revolution and which has been able to maintain a huge market share despite new competitors. As a result, as the robotic vacuum cleaner revolution goes mainstream and global, iRobot should grow rapidly.

But, the fundamentals of IRBT stock don’t presently support a $110 price tag. Here’s the math.

The global vacuum cleaner market was right around $7.5 billion in 2017, up from $5 billion in 2012, translating to annual growth of more than 8%. Robotic vacuums had global market share of 23% in 2017, close to double their 2012 share of 13%. Meanwhile, iRobot’s share of the robotic vacuum market has stayed around 60%-plus over the past three years.

Going forward, the global vacuum cleaner market should grow around 5% per year to $9.6 billion by 2022. The market share of robotic vacuums should almost double again, reaching about 40%. And iRobot’s market share should naturally diminish as the market grows and new entrants come in, but that share should ultimately remain around 50%, thanks to the company’s track record of dominance in this space.

Put all that together, and you are looking at revenue of about $1.9 billion in 2022 for iRobot. Assuming that the company’s gross margins continue to trend higher, its earnings per share should come in at roughly $6. Applying a forward price-earnings multiple of 20 times, the average multiple for growth stocks, implies a 2021 price target of $120. After discounting by 10% per year, we arrive at a 2018 price target of $90.

Thus, iRobot’s business as it presently stands is worth around $90 per share. Granted, one of the reasons to own this stock is that the company is going to launch new products, and iRobot will eventually become a global consumer household robotics company. But are the company’s businesses other than its vacuums really worth $20 per share today? I don’t think so, given their lack of clarity, tangibility, track record, and scale.

Bottom Line on IRBT

The long-term bull thesis on IRBT, which states that the company is emerging as a leader in the consumer household robotics market, remains compelling. But at this point in time, it looks like too much speculation is being baked into iRobot’s stock price. Moreover, the technicals suggest that the recent rally has been too far, too fast.

As a result, I predict that IRBT will trade sideways to down over the next several months and subsequently rise significantly.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/two-big-reasons-red-hot-irobot-stock-needs-to-cool-off/.

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