The iRobot Bull Thesis Is Much More Than Short-Squeeze Mania

Shares of iRobot (NASDAQ:IRBT) soared on Monday after the robotic vacuum-maker benefitted from a short squeeze that seemingly came out of nowhere. IRBT stock popped as much as 50% on the day, before settling down. Shares are presently up about 16% on the day.

An iRobot (IRBT) Roomba inside Saturn electronic store
Source: Grzegorz Czapski / Shutterstock.com

Zooming out, there are three big things to note here.

First, the big rally in IRBT stock is part of a much broader, market-wide short squeeze wherein pumped-up bulls are simply seizing control of heavily shorted stocks and forcing long-time short sellers to quickly cover their positions. See: GameStop (NYSE:GME) stock, or Bed Bath & Beyond (NASDAQ:BBBY) stock or AMC (NYSE:AMC) stock.

Second, this broad short-squeezing dynamic will not last. It will end. When it does, many of these high-flying stocks will come back down to Earth.

Third, when IRBT stock does come back down to Earth, be ready to buy the dip. That’s because — while IRBT stock has been caught up in this short squeezing mania — the long-term iRobot bull thesis is about much more than a near-term short squeeze. It’s about automation. It’s about smart homes. And it’s ultimately one wherein iRobot will sustain big revenue and profit growth for the next several years.

So, big picture, don’t get caught up in the short squeeze in IRBT stock. Instead, focus on the fundamentals, be patient and be ready to buy the dip once all this mania settles down.

Short-Squeeze Mania

The past few weeks in the stock market have been wildly interesting.

Many of the market’s biggest multi-year losers — like GME stock, BBBY stock and AMC stock — have turned into multi-bagger winners seemingly overnight.

Why? Favorable economic developments are coupling with a mile-high wall of liquidity to spark enormous short squeezes.

Long story short, the economic outlook is rapidly improving. Covid-19 vaccines are being distributed on a widespread scale. That sets the stage for economic normalization in 2021, which should lead to a consumer and enterprise spending rebound, the likes of which should cause a sharp bounce-back in economic growth in 2021-2022.

At the same time, central banks and governments across the globe have pumped an unprecedented amount stimulus into the global economy. This mile-high wall of liquidity is giving bulls ample ammunition to throw into the stock market. They’re doing just that.

When they throw money at heavily-shorted stocks like GME stock, BBBY stock and AMC stock, that causes short sellers to second-guess their positions and start covering. In those stocks, then, you have a double tailwind with bulls buying and shorts covering. The more this happens, the more shorts get scared and the more covering you get — which, of course, creates a short squeeze that only accelerates the rally.

It’s short-squeeze mania.

IRBT stock is caught up in this short-squeeze mania, mostly because it is a heavily shorted stock with about 40% of the float sold short. This is mostly why IRBT stock was up as much as 50% at one point on Monday.

Crazy Times Won’t Last

The short-squeeze mania won’t last.

Eventually, the shorts will have covered and the bulls will run out of ammo. As these two demand tailwinds dry up, the fundamentals will once again take center stage. For some of theses stocks, that’s bad news, since the underlying fundamentals are not that good. Thus, at some point in the foreseeable future, many of these short-squeeze stocks will likely collapse.

When will that happen?

No one really knows. But, as sure as the sun rises every day, it will happen.

IRBT stock got caught in the short-squeeze mania. It will likely fall back once the mania ends. But not by much, and that dip will be a great long-term buying opportunity, because unlike many of its short-squeeze peers, iRobot is actually a very strong company with very robust fundamentals and a very bright future.

Be Ready to Buy the Dip in iRobot Stock

iRobot is an automation play.

The story is simple.

Automated technologies are taking over the world. Self-checkout kiosks are taking over retail stores. Automated productivity software is taking over the workplace. Burger flipping robots are taking over kitchens. Self-driving cars are taking over the auto sector.

Everywhere you look, automated technologies are either already or on the cusp of disrupting the status quo.

Robotic vacuum cleaners are a niche of this broader automation theme. Consumers are gradually replacing their manual vacuum cleaners with automated RVCs because the RVCs save time and hassle. As the technology of these RVCs improves — i.e. they become smarter, cheaper, more durable and more efficient — they will take over the $50-plus billion vacuum cleaner market.

Yet, RVCs today represent just 13% of the vacuum cleaner market. Thus, there is a long runway ahead for that number to climb to 20%, 30% and higher over the next few years. As that happens, the RVC market will sustain healthy double-digit annual revenue growth.

In the booming RVC market, iRobot is the undisputed king. The company is the first-mover and the category creator that has consistently sustained 50%-plus RVC market share for several years. Importantly, that share has stabilized around 52% in recent years, even amid rising competition, because iRobot is launching new products (the Roomba i3+) and features (Genius Home Intelligence platform) which, in sum, distinguish its products as the best-in-breed RVCs in the market.

iRobot, therefore, is in a great position to sustain 10%-plus revenue and profit growth over the next several years. Assuming so, my modeling suggests IRBT stock is worth $140 today, based on the company’s future growth prospects.

Bottom Line on IRBT Stock

IRBT stock is caught in a short-squeeze mania right now. But iRobot, the company, is about much more than a near-term short squeeze. It’s about a long-term trend toward automated technologies.

So, if and when this short-squeeze mania dies down and IRBT stock drops, buy the dip. This a long-term winner that has good, fundamentally supported upside to $140 in 2021.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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