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Why You Should Buy the Dip In iRobot Stock

With new products launching throughout 2019, one bad quarter doesn’t justify the bearishness in IRBT stock

Shares of robotic-vacuum giant iRobot (NASDAQ:IRBT) plummeted in late April after the company reported first-quarter numbers which missed revenue expectations. The disappointing sales broadly implied that the company’s robust growth trajectory was flattening out. Formerly red hot IRBT stock cooled down. By a lot. It fell nearly 25% in response.

Don't panic on iRobot stock just on Q1
Source: Shutterstock

To be fair, the iRobot growth narrative did slow down dramatically in the first quarter. But this slowdown is largely meaningless because it’s temporary. Over the next three quarters of 2019 and into 2020, growth will re-accelerate thanks to new product launches. One of them includes the debut of the highly anticipated robotic lawnmower Terra.

As such, the market seems to be overreacting to a Q1 slowdown in iRobot stock that simply won’t last much longer than this quarter. As growth re-accelerates through the balance of 2019, bulls will take charge again, and IRBT stock will rebound meaningfully.

The main takeaway? Buy the dip in iRobot stock. This stock won’t stay depressed for much longer.

Q1 Numbers Hint at Scary Slowdown for iRobot Stock

As I mentioned above, iRobot’s Q1 numbers were not good. Unfortunately, covering analysts priced IRBT stock for great numbers. This combination of lousy metrics and a rich valuation ultimately caused iRobot stock to fall off a cliff.

Q1 had two conspicuous negatives. First, growth has decelerated substantially. Second, margins are coming under pressure due to various factors.

First off, revenue for iRobot stock and operational growth metrics came in at their lowest levels in recent memory. Specifically, units-shipped growth dropped to below 8%. Last quarter, it was above 25%. Through all of 2018, units-shipped growth was north of 15%. Meanwhile, revenue growth dropped to below 10% after largely 20%-plus revenue growth throughout 2018. This was led by a slowdown in both the domestic and international businesses.

On the second point, gross margins for iRobot stock slipped badly in the quarter. They dropped 300 basis points year-over-year due to pricing and promotional activity. This is a huge deal for investors. Gross margins have been consistently trending higher for several years, despite rising competition, because iRobot has exercised unparalleled dominance across the whole consumer robotics space. But gross-margin erosion in Q1 implies that the competition may be creeping up, and that’s a red flag for investors.

In summary, iRobot’s first-quarter numbers didn’t inspire much confidence. Growth slowed and margins took a step back. Meanwhile, IRBT stock was trading near multi-year high valuation levels heading into the print. As such, the slowing growth and margin-erosion red flags led to a wave of selling in iRobot stock.

This Slowdown Won’t Last

However, the post-earnings plunge in IRBT stock is based on fears that are unnecessarily short-sighted.

Sure, growth is slowing. But it won’t slow for long. IRBT plans on launching two new products next quarter. Those new product launches are expected to propel revenue growth back to the high-teens range. Meanwhile, the Terra robotic lawnmower is set to launch later this year, and that new-product launch is expected to help drive nearly 20% revenue growth for the full year 2019.

Consequently, you shouldn’t get hung up on the sub-10% growth rate, as viable new products will again ramp up revenue. Therefore, I expect sales growth to return to approximately end-of-2018 levels.

Also, gross margins did take a step back in the quarter, and they are also expected to fall back for the full year. But this gross-margin erosion is mostly tied to new product launches and promotional activity surrounding those launches. Obviously, these promotional expenditures won’t last forever. Thus, towards the back half of the year and into 2020, gross margins should start expanding again.

Further, international growth rates were naturally hit by price hikes which the company instituted to offset tariffs. However unsteady the progress, both sides will probably eventually strike a deal. If so, those tariffs go away, and iRobot can lower their prices. That will provide a tailwind for international growth.

All in all, then, the outlook for the rest of the year is for operations to dramatically improve from a depressed Q1. As operations do improve, IRBT stock should bounce back.

Bottom Line on IRBT Stock

The face of the consumer robotics revolution is iRobot, and this revolution is still in its first few innings. As such, this company projects as a big grower for the foreseeable future, and that big growth will ultimately keep IRBT stock on a winning path.

Right now, IRBT stock is being beaten up on ephemeral Q1 slowdown concerns that will pass as growth re-accelerates with new product launches throughout the rest of the year. Consequently, right now seems like a good time to buy the dip in a long-term winner.

As of this writing, Luke Lango was long IRBT.


Article printed from InvestorPlace Media, https://investorplace.com/2019/05/why-you-should-buy-the-dip-in-irobot-stock/.

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