iRobot (NASDAQ: IRBT) sells innovative products in a growing market. The company has shown strong, steady, double-digit growth. Management has a very strong growth orientation for the coming years. But the company faces severe headwinds. I’m worried inadequate diversification, targeting cuts and a slowdown in retail purchases.
At the current price, I don’t think the potential reward justifies the risk. But management predicts significant growth in the later half of this year. I think iRobot’s shares may be undervalued if the company meets its targets for this year.
Growth and Orientation
Shares of iRobot have fallen in recent months. This comes after disappointing first-quarter results and a significant cut in guidance. By the end of 2021, the business had been geared towards revenue growth of 15% per year. In the last quarter, management reduced that estimate to just 8%. The profitability of the company also suffered. After first quarter results, iRobot is now unprofitable for the last twelve months.
These weak results have overshadowed iRobot’s extremely optimistic long-term orientation. In its last investor day, iRobot released long-term financial projections calling for revenue to increase by almost 60% in 2024. The company also targeted a BPA of $ 7.50 to $ 9.25 in 2024. it would mean an increase of 600% to 750% over last year’s figures. .
In its latest earnings call, iRobot’s leadership explained how they hope to change the year. They believe the company can make up for a poor Q1 and Q2 with good performance in the later half of the year. In fact, management increased the midpoint of its EPS target for 2022 from $ 1.75 to $ 1.80 per share.
In the long run, one of the key issues I see with the company is its dependence on a product. The company sells a range of products, but its latest 10-K reveals that floor cleaning robots are its only real source of revenue. In the last fiscal year, 90% of iRobot’s revenue came from its Roomba products. Almost all of the remaining revenue comes from their Braava line (which are robotic mops). This causes the company to be overexposed to the consumer electronics and home appliances markets. These markets are very cyclical. iRobot must continually sell new units to generate revenue. This means that a downturn in the economy in general would seriously hurt the company.
Management is taking steps to address these concerns. iRobot is in the early stages of diversifying its product line. Late last year, the company acquired Aeris Cleantec AG, an air purifier company. New products are still being integrated into the iRobot product line. The company is also researching automated mowers.
The company’s long-term plans also address the cyclical nature of the industry. Management wants to sell these new products and accessories to existing customers. They also plan to introduce a subscription model for more consistent revenue.
I think these are steps in the right direction. However, there is not much to show for these projects at the moment. Neither air purifiers nor subscriptions have generated significant revenue so far.
Excess inventory and retail exposure
This brings me to my biggest concern with iRobot. The company has a high exposure to retailers during a period of oversupply. The previous year, retail partners generated 88% of iRobot’s revenue. This is not great news amid an unexpected drop in retail spending since the last iRobot report. Retailers are lowering prices and canceling orders from their suppliers. Electronics and appliances seem to be one of the most affected categories. I think this is likely to negatively affect iRobot. I will be closely watching the sales direction going forward.
A decline in spending could hurt even more due to iRobot’s problematic inventory management. The company has extremely high inventory levels. As of its last quarterly report, the company had 165 days of inventory on its balance sheet. That’s almost double their 10-year average of about 80 days.
Since its last earnings call, management expects that number to stay high for a while. The company has very strong sales in the later half of the year to recover. This is a problem if the company’s demand does not meet its projections. Any excess inventory will affect cash flow and incur additional costs (such as inventory maintenance costs).
I don’t find the iRobot rating to be remarkably cheap. The company is trading at a term P / E just above 20. This is roughly what it would be willing to pay for a company to grow at a high one-digit rate.
This assessment becomes more complicated when I consider the long-term orientation of the company. The 2024 target of $ 7.50 to $ 9.25 per share would give iRobot a P / E of 4 to 5. This would make its shares a bargain. Even if growth moderates significantly after that, it would still be willing to pay three or four times the current valuation.
But if iRobot doesn’t meet its financial goals, its shares seem too expensive. If revenue is steady or declining, I would not be willing to pay more than 20 P / E. The market has a certain pessimism, but I don’t think it’s enough to cover possible drawbacks.
iRobot is a company with fantastic growth potential. However, the company is also a cyclical business without a diversified product line.
I think the next two quarters are an opportunity to test management guidelines. I want to see that iRobot is able to generate good revenue growth and increase inventory turnover. If that happens, I would be willing to buy the shares (even at a higher price).
There is a lot of uncertainty around iRobot and I think it is more likely a bearish outcome. I don’t think the risk of reward is favorable to the current price, so I don’t recommend buying or holding these shares. It may be worth looking at the business for investors interested in the home appliances or robotics industry.