Why iRobot Stock Got Killed This Week

iRobot (NASDAQ: IRBT  ) stock got pummeled this week, falling more than 11%, despite reporting better than expected results for its fiscal 2014 first quarter. The Massachusetts-based robotics company earned a profit of $0.18 per share in the period, which was $0.02 above what analysts were expecting. iRobot's first-quarter revenue of $114.2 million also trumped estimates for the quarter. The company's consumer-robots business achieved sales growth of 17% year over year as it rolled out new products including its higher margin Roomba 880.

On the surface, this all seems to bode well for the company going forward. So, why did Mr. Market decide to crush iRobot's stock this week, despite these encouraging results?

The proof is in the profits
A closer look reveals declining profitability and weak guidance for the upcoming quarter. While iRobot's earnings topped Wall Street's estimates for the quarter, profits were down year over year. To be sure, iRobot generated net income of $5.3 million in the first quarter of 2014, down from $8.4 million during the same period a year ago.

That translated into quarterly earnings of $0.18 per share, which was a 37% decline from $0.29 per share in the year-ago period. To be fair, first-quarter 2013 earnings per share included a one-time benefit from taxes. But that only added $0.08 to the company's bottom line that year so even without it iRobot's profitability took a hit.

Aside from declining profits, it seems the market is also punishing iRobot for weak guidance in the current quarter. iRobot now expects to earnings per share in the range of $0.15-$0.25 per share in the second quarter. But even if it achieves the high end of this range it would still be significantly lower than the $0.28 per share it earned in the year-ago period.

Declining sales in its defense business are primarily to blame for this downward trend. In fact, revenue from iRobot's defense and security bots declined by half in the recent quarter to $5.6 million, down from $11.1 million in fiscal 2013. While iRobot's chief executive Colin Angle said the company's defense segment performed "as expected" in the period, investors will want to see iRobot forge new growth channels in the quarters to come.

New opportunities
One way iRobot could accomplish this would be through its new Ava and RP-VITA robotics platforms. These automatons give iRobot a much-needed entry into the health care and enterprise markets, which should fuel growth for the company down the road. For now, it seems Mr. Market is growing impatient waiting for iRobot to fully exploit these new growth opportunities. The company's Ava 500 video collaboration devices, for example, only just became available to the market last month. Ultimately, it will take time and money for iRobot to build out these platforms and grow its customer base in the health care and enterprise space.

With the stock trading down nearly 3% today at around $34 a pop, it seems investors are losing confidence in iRobot's ability to grow profits in the future.

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Tamara Rutter

I've been an analytical writer for The Motley Fool since 2011. I cover the sectors of Consumer Goods, Technology, and Industrials. Connect with me on Twitter using the handle, @TamaraRutter -- I'd love to hear from you!

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8/31/2015 3:55 PM
IRBT $29.32 Up +0.03 +0.10%
iRobot CAPS Rating: *****