iRobot has had a sizzling couple of years. Some timely distributor acquisitions, combined with an updated Roomba launch, reinvigorated what previously looked like a tired growth story. From $30/share, IRBT stock reached almost $120/share last summer.

Since then, however, the stock has lost close to a quarter of its value. The general market troubles certainly played a role, but iRobot stock has failed to bounce back quickly even with the market’s vigorous January reversal. What’s holding the stock back?

Spruce Point Takes Aim (Again)

Activist hedge fund Spruce Point Capital took another shot at IRBT stock with its recent research update on the iRobot. Spruce Point has been warning investors about iRobot since 2014, when it noted that shares were about to “short-circuit”. Obviously, they’ve been wrong on that call — at least so far. But, as a firm, they make good picks more often than not, and this has been a relentless bull market, after all. It’s hard for short sellers to shine in these sorts of conditions. So, let’s not dismiss their concerns out of hand.

What’s Spruce Point worried about now with iRobot? In 2017, Spruce Point suggested that new competition in the pivotal Roomba market would derail IRBT stock. While the acquisition of several distributors has juiced iRobot’s numbers, Spruce Point suggests that competition from other home-cleaning robot lines will undercut iRobot.

They cite iRobot’s increasing reliance on the Amazon (NASDAQ:AMZN) marketplace. There, it is harder for brands to maintain their prestigious position with customers. Products are subject to Amazon’s algorithm, and it’s easier for customers to defect to a cheaper product than if they’d bought their Roomba through a different retail channel.

And That’s Not All

Spruce Point has plenty more ammunition to fire against IRBT stock. Bulls like to point out that iRobot was founded back in 1990 and that one of its founders remains in charge of the company. But Spruce Point suggests this is worth less than it appears, as insiders have been selling off their stock for a long time. They still owned 60% of the company as recently as 2005. That dropped to 12% in 2013, under 5% in 2015 and is down to just 3.5% now. Spruce Point suggests management’s promotional statements — such as a hyped partnership with Alphabet (NASDAQ:GOOGL) — along with a modest share buyback program are cover so insiders can keep selling more shares.

They also bring up the tariff issue. Management has made allowances for what would happen if the 10% tariffs remain in place throughout 2019. However, Spruce Point suggests that they were evasive about the potential consequences if and when tariffs step up to the 25% level.

The bearish report states that, based on earnings alone, a more reasonable fundamental valuation for IRBT stock would be 40% below recent levels. Throwing in other concerns including tariffs, insider selling and various additional issues, Spruce Point concludes that IRBT stock is worth just $20-$30/share. That’d be close to 75% downside from today’s prices.

The Bullish Case For iRobot

Now, it’s not all bad news for IRBT stock. Far from it. Bulls can make credible counterarguments to the above points. For one thing, despite the threat of rising competition, earnings continue to surge. Since 2014, EPS has nearly doubled, from $1.25 to $2.36 per share. EBITDA per share has more than doubled. Additionally, gross margin has risen from 46% to 50% over the past four years, suggesting that the company is not sacrificing profits to sell more units.

Another solid point is that iRobot is branching out past home devices — in particular, the Roomba. iRobot is launching sales of its lawn-mowing robot in Germany this year, with plans to put it in beta release elsewhere. In theory, this could represent a huge market for iRobot. It also helps overcome the stigma that iRobot has struggled to innovate while competitors catch up.

That said, Husqvarna has sold lawn-mowing robots for two decades. However, its solutions generally involve using boundary wires, whereas iRobots rely on smart maps, making them easier to set up.

The Roomba itself continues to improve nicely. For one thing, the room-mapping technology should make the latest Roomba models a lot more useful for users. Other new features, such as a larger trash bag at the Roomba’s home station will greatly reduce the number of times a human user has to empty out the waste. On top of that, you can now activate Roomba with voice commands, making it easier to manage for those with Alexa and other such voice-activated assistants.

IRBT Stock Verdict

I don’t have a dog in the IRBT stock fight. I highly respect Spruce Point as a research firm, as it has made numerous great calls in the past. This one seems ambitious however, especially the $20-$30/share price target.

I don’t see that happening anytime soon.

On the other hand, the stock is clearly expensive, even after the recent pullback. IRBT is selling at 33 times trailing and 31 times forward earnings. The company will need a lot more earnings growth going forward to justify this share price.

Perhaps they’ll get it with the lawn-mowing line of robots or some other new innovation. The Roomba updates, while welcome and greatly additive to the user experience, don’t seem like quite enough to move the stock higher from this price. It’s also worth watching how the tariffs situation plays out, as that could cause an earnings miss later this year.

At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.