Why iRobot Corporation Stock is Getting Plundered

It cleans floors. Scrubs pools. Disarms bombs. But on Tuesday, robo-tech company iRobot (NASDAQ: IRBT  ) couldn't quite manage to please Wall Street.

iRobot's most famous creation, the Roomba robotic vacuum. Photo: Wikimedia Commons.

Expected to report  fiscal Q2 2014 results of $0.22 per share in profit on $142.5 million in revenues, iRobot leapt the first hurdle with ease, reporting $0.28 per diluted share in profit (about equal to its performance last year). Revenues, however, fell short of expectations at just $139.8 million.

So far this year, iRobot has still earned only $0.46 per share. That's about 19% less than it had earned by this time last year. But according to CEO Colin Angle, this result "met our expectations." Going forward, though, Angle expects even better performance out of his company.

Citing "strong backlog growth" in the company's military robots division, an expectation of "several expected near-term orders," and also "increased confidence in Home Robots," Angle said that iRobot expects to earn anywhere from $1.10 to $1.20 per share by the end of this year on revenues of about $560 million. This suggests that revenues will flow faster in the second half of the year, while H2 profits will be at least 39% better than what we saw in H1.

Which begs the question: Why is iRobot stock selling off on the news?

There are probably at least a couple of explanations for this. The Q2 sales miss is the most obvious. But of greater concern may be the fact that the sales misses will keep on coming. iRobot doesn't seem to think it will make up the missed sales from Q2 over the next six months. Rather, the company's new full-year revenue guidance shows iRobot projecting about $5 million less in full-year sales, than it expected to book just three months ago.

Valuation matters -- and growth does, too
Why might this worry investors? Well, consider this: At last report, Wall Street analysts were projecting that iRobot would grow its earnings at an annual rate of 33% over the next five years. If it can accomplish this, there might be a case to be made for the stock not being absurdly expensive as compared to its recent valuation of 46 times earnings.

Problem is, 33% growth didn't happen in Q1 or in Q2. Free cash flow at the firm is nonexistent with iRobot having burned through $13.3 million over the first half of the year (a reversal of iRobot's free-cash-flow, or FCF positive 2013 first half). And while management is promising significantly better profits in this year's second half, even the top end of guidance ($1.20 per share) suggests a growth rate of less than 28% -- five full percentage points slower than what analysts had told investors to expect.

What this leaves us with is a very expensive stock -- a stock that, while growing strongly, really isn't living up to the expectations that have been built into its very expensive stock price.

Hence, the sell-off.

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Rich Smith

As a defense writer for The Motley Fool, I focus on defense and aerospace stocks. My job? Every day of the week, I'm monitoring the news, figuring out the winners and losers, and tracking down the promising companies for you to invest in. Follow me on Twitter or Facebook for the most important developments in defense & aerospace, and other great stories.

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