Two months ago, after reviewing iRobot's (NASDAQ:IRBT) strong showing in its second-quarter earnings report -- sales steady year over year despite having sold off an entire business division -- my fellow Fool Steve Symington declared "now is an exciting time to own shares of the home robot maker."
Turns out, Wall Street is starting to agree with that assessment.
Bright and early Thursday morning, analysts at Needham & Company announced that they are raising their price target on iRobot stock from $42 to $46, and doubling down on their recommendation to buy the home robot maker. With iRobot shares currently priced just over $40, Needham's latest price target promises a 15% profit for new investors today. But is that profit realistic? Is Needham right in recommending iRobot?
Here are three things you need to know.
1. This is not your father's iRobot
Up until just a few months ago, iRobot was a diversified manufacturer of robots. iRobot made robots that vacuumed floors...and mopped them, too. It built robots to clean pools, de-gunk gutters, offer "telepresence" in homes, and even disarm bombs.
In April, though, iRobot began returning to its roots as a Roomba-maker, first selling off its defense and security division (bomb-bots), then shuttering its telepresence division. As Steve recently explained, "100% of iRobot's resources going forward will be exclusively focused on consumer robotics solutions."
2. iRobot gets grounded
That means that the future for iRobot will depend very much on the success of its Roomba vacuum cleaners and Braava floor moppers -- or as Needham calls it, the "wet-floor category." In a write-up covered on StreetInsider.com today, Needham argues that these rather mundane-sounding businesses could "deliver positive surprises" for investors.
Previously, Needham had predicted that iRobot's sales in home robots would grow 16% in 2016 -- but after meeting with management, the analyst now thinks that estimate may have been too "conservative." Hence the higher price target.
3. How conservative was it?
Last quarter, iRobot reported 27% growth in domestic sales of home robots here in the U.S. Total sales of consumer robots grew only 8%, but mainly because the company is still busy retooling its model for selling home robots internationally, in particular in China and Japan.
Sales abroad, accordingly, declined in the quarter, sapping strength from the domestic growth. But once the international business gets growing again, we could see more and more of that strong domestic growth appear in the company's overall top-line results.
The most important thing: Valuation
But does this hoped-for future good news make iRobot stock a buy? Let's run some numbers.
According to iRobot's latest guidance, the company expects to book as much as $645 million in revenue this year, and earn net profits of up to $1.40 per share. Weighed against the company's $1.1 billion market capitalization, therefore, iRobot stock is selling for about 1.6 times projected full-year sales, and roughly 28.8 times earnings.
Data from S&P Global Market Intelligence show that most analysts are largely in agreement with Needham about iRobot growing at better than 13%. In fact, earnings growth projections over the next three years average about 18.5% annualized. That sounds a bit slow, though, to justify a 28.8 times earnings valuation on the stock. (In fact, even if you give iRobot full credit for its debt-free, cash-rich balance sheet, and value the company on its cash-adjusted market cap of $895 million, iRobot stock appears to be selling for a rich 24.2 multiple.)
So long story short? iRobot appears to me to be yet another in a long string of good companies selling for too-high prices. Needham is probably right that iRobot will grow faster than 13%. It's just wrong about the stock being a buy at the higher growth rate.