IRobot share-price fears are exaggerated

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Looks like Bedford-based iRobot Corp., maker of the iconic Roomba robotic vacuum cleaner (above at left) and other consumer products (including the Braava floor-washer, at right), was stricken by a case of the shorts Tuesday.

As described by Motley Fool (http://bit.ly/2ufqcdp), noted short-seller Spruce Point Capital announced it has “re-established” its short position in iRobot, updating a report from three years ago in which it stated the stock could face downside risk of up to 50 percent (Aside: Given that shares have risen 150 percent in just the last year alone, they will have to fall a whole lot more than even 50 percent to allow for that prediction to come to fruition.)    

But somebody took the announcement to heart, as iRobot shares were clipped by more than 10 percent on Tuesday, closing at $90.65.

Spruce’s argument doesn’t sound all that strong to this amateur observer. It notes that iRobot benefited from a restocking of its supply chain, the annexation of its struggling defense business (remember the PackBot, of Afghanistan cave-searching fame?) and its acquisition of a Japanese distributor, all of which will make year-over-year comparisons tougher.

Well, perhaps. And certainly the past year’s 150 percent gain screams for some sort of pullback. But I’m not sure that, over the long  term, iRobot’s story isn’t still compelling.     

As the Motley Fool story also points out, Spruce is also concerned with “disruptive competition” coming to the U.S. market — in other words, more robot makers.

It says here, though, that being first matters, especially if you’ve got a good product. And iRobot was first (at least first to dominate the consumer robot market), and its 88 percent share of the robotic vacuum space speak volumes for its strength, and provides it a huge advantage going forward.

Second, the Asia opportunity is simply huge. China and India together have about eight times as many people as does the U.S., and as households form and modernize, iRobot’s first-in strategy is bound to pay dividends (or at least generate sales).

Valuation? OK, in some respects iRobot’s current share price is pretty rich. It currently represents 54 times expected 2017 earnings. But according to analysts covered by Yahoo Finance, iRobot is expected to post earnings of $1.67 per share this year and $2.54 next. While that 2018 number is still about 35 times earnings, given Tuesday’s closing price, the year-over-year earnings growth would be more than 50 times, which would seem to provide some justification for the lofty multiple.     

Tuesday’s closing price also represents 3.5 times sales, which is not an outrageous number for wide-moat technology company. I like sales ratios better because, while earnings can be jerked around, sales are sales. What you see is what you get.

I’m not sure I’d buy iRobot now — maybe a nibble just to get in for the long term. The pullback fears are real, but I see them as temporary. But if I already owned shares (I don’t), I wouldn’t be quick to head for the exits.

  

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