iRobot Corporation: Should Investors Bet on the Future?

While iRobot is not a mature company centered on earnings growth, nor a growth company focused on rapid revenue growth, it still has its place in investors' portfolios.

May 13, 2014 at 9:30AM

When looking to purchase a stock for the long haul, 90% of the time I'm looking to do so based on its fundamentals. While iRobot (NASDAQ:IRBT) doesn't have the most compelling valuation story, it does have other compelling components that led to my long position in the stock. 

Generally, I'm searching for one of two things in my investment thesis: A dependable company that is consistently growing earnings per share and its dividend payout, or a growth company that is significantly increasing revenues and earnings in a secular growth environment with reasonable valuation metrics.

However, iRobot doesn't fit either of these scenarios.

Valuation and past results
The stock trades at an expensive 42 times last year's earnings and 25 times next year's earnings. Compare that to the Nasdaq 100, which trades at 20.8 times last year's earnings and 18 times next year's earnings.

Below is a look at the company's last five years' worth of earnings per share and revenues:


EPS ($)

EPS Change ($)

EPS Growth

Revenues in Millions

Rev. Change in Millions

Rev. Growth





































2014 (est.)







Source: MSN Money 

The big question from the above data arises when you see how sales and earnings rocketed higher in 2011, before trailing off in 2012. According to the company's conference call for fiscal 2012, iRobot experienced rapidly declining sales from its defense and security business. 

This was at a time when the United States was withdrawing troops from Afghanistan. As a result, sales for robotics in the field dropped, not surprisingly. 

Turning it around
Today, the company's sales have rebounded thanks in part to its home consumer sales. Now, I say the forward valuation is slightly expensive at 25 times earnings because iRobot only expects to grow earnings around 15% this year, according to the guidance provided in its recent first-quarter-earnings report. 

However, that doesn't make the stock non-investable. For small companies that have plenty of potential, but not the most attractive traditional valuation metrics, there's a different number that I like to look at: market cap. 

Often, when one examines any of those fly-by-night momentum stocks, the question is unavoidable: How it will ever grow into its current $10 billion or $20 billion market cap? Look at Twitter, for example.

The company has no earnings, slowing rates of monthly active users, and a $22 billion market cap. With insane valuation metrics and no profit, it's hard to picture the company growing into that market cap -- which has shrunk considerably in the past month -- while maintaining reasonable valuations. 

In this case, however, iRobot only has a market cap of $1.01 billion. One can realistically envision this company having a modest market cap of $3 billion-$5 billion within the next five years, without having an egregious valuation. Especially if you believe that the robotics industry and improving technology has plenty more room to grow. 

Of course, we can't just "imagine" a company being worth X amount of dollars down the road. But sometimes you need to have some forward-looking vision when choosing your smaller investments. That's the case with iRobot, which also has solid sales and earnings to prevent it from being purely a pipe dream. 

It's also worth mentioning that the company has zero long-term debt, which is a positive when scoping out potential investment candidates. 

Home robot growth potential
The company experienced 30% sales growth in 2013 for its home robot division. The new additions of the Roomba 800 Series vacuums and Scooba 450 floor scrubbing robot are helping to increase sales. 

According to the 2013 fourth-quarter conference call, home robot sales are also growing robustly in Asia Pacific -- mainly driven by China and Japan -- increasing 40% in 2013.

Management did not specifically state how much growth they expect out of Asia Pacific, only that it expects "strong 2014 growth in each of our three markets," (the other two being North America and Europe), according to CEO Colin Angle. In the most recent earnings report, management left guidance unchanged. 

Takeover target?
Another avenue worth considering is in merger and acquisitions. iRobot, with a relatively low market cap, is a takeover candidate. While it might not come from Google (NASDAQ:GOOG), the technology giant recently acquired eight robotics companies within a six-month period. 

While a $1 billion price tag (and likely more, assuming the acquirer were to pay a premium for iRobot) isn't cheap, it's certainly not out of the question for many big name technology companies -- like Google -- to spend in M&A activity. 

The robotic finish
To be honest, the company's dependency on the home robot division is slightly frightening. However, it has recently introduced the new Ava series robots. 

While the lineup is still very young, it is designed for the corporate and health care landscapes, where the latter of the two environments could be a huge market for iRobot. For now however, the results are still too new to know how much potential that is exactly. 

I am excited to listen to the upcoming conference calls to see what CEO Colin Angle and his team plan to do going forward and what technology they may have on the way.

This is a long-term play on a company that has very impressive technology, with its hands in the defense, consumer, health care, and corporate landscapes. It is not a booming growth company. Instead, it's a young, small market cap company with a solid start in what could likely be a very relevant field in the future.

Are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Bret Kenwell owns shares of iRobot. The Motley Fool recommends Google (C shares) and iRobot. The Motley Fool owns shares of Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information