Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Up 69% since the year began, and up nearly 160% over the past year, iRobot (NASDAQ:IRBT) stock is on a tear. But how much longer can this momentum last?
That's the question investment banker Canaccord Genuity is posing to investors this morning as it downgrades the maker of Roomba robotic vacuums and Braava floor-washers from buy to hold -- and assigns iRobot stock a $90 price target, implying a 10% drop in stock price.
Here are three things you need to know about that.
1. A blowout quarter
Much of iRobot's gains in stock price can be traced back to April's terrific earnings report. Last month, iRobot reported 29% growth in sales year over year, alongside earnings of $0.27 per share -- more than twice what Wall Street had been expecting.
On top of that, iRobot raised guidance and told investors to expect full-year fiscal 2017 sales to range between $780 million and $790 million, promising profits of $1.45 to $1.70 per share by year's end.
2. The storm before the calm
This news sent iRobot shares skyrocketing 15% the day after earnings, and over the ensuing weeks, iRobot has more than doubled those gains, rising 41% in just a little over one month. But according to Canaccord Genuity, this move has gone too far, too fast.
In a report covered by StreetInsider.com (link requires subscription) this morning, the investment banker explains that while it "remains positive" on iRobot's "growth outlook" over the long term, iRobot lacks any new "flagship" product to drive sales in 2017 in particular. This lack of a must-have robot from the consumer robots producer, warns Canaccord, "could raise uncertainty ahead of the holiday season," and cause investors to pull back from the stock.
3. Long-term versus short-term investing
Thus Canaccord is adopting a more cautious view on iRobot this year -- but at the same time, Canaccord may be preparing to switch gears as soon as next year. Splitting iRobot's earnings guidance for this year right down the middle, Canaccord posits profits of $1.58 per share for 2017. But by as early as next year, Canaccord thinks those profits could leap ahead to $2.54 per share -- a 61% one-year jump that could definitely excite investors into buying the stock again.
But is such a jump achievable?
The most important thing: Curb your enthusiasm
I'm not so sure. After all, while iRobot's growth last quarter was certainly impressive (and this year's guidance is even more so), S&P Global Market Intelligence data show that the best iRobot managed last year was a 1% increase in profits per share (and it only managed that by shrinking its share count). Fact is, iRobot hasn't managed to grow earnings at a 61% pace at any time in the past five years (though it did come close in 2013, growing earnings by 54%).
Overall growth in net income for the past five years has averaged a very respectable 30% -- but that's still half the rate of growth that Canaccord is predicting for 2018. Perhaps even more importantly, over the next five years, the consensus expectation on Wall Street is that iRobot profits will grow only 18% annually.
So what does this mean for investors?
Valued at more than $2.7 billion today, iRobot stock sells for the princely valuation of 50 times trailing earnings. Granted, were iRobot capable of growing its profits at 61% next year, and continuing to grow earnings at 61% over the long term, even 50 times earnings might be a bargain valuation on iRobot stock. But if it can't, it won't be.
Canaccord Genuity is right to downgrade iRobot today.