Roomba robotic vacuum cleaner maker iRobot (NASDAQ:IRBT) saw its stock sell off hard on Wednesday, with the shares falling as far as 9.7% in early trading before bouncing back to close the day down "only" 6.3%.
Why? It appears this was sort of a "good news, bad news" situation. On the one hand, iRobot is getting a lot of ink in the pre-Black Friday holiday press for big discounts it's offering on its Roomba vacuums. On the other hand, investors may be worrying about what those discounts might mean for iRobot's profits.
So here's how the story goes. On Nov. 1, USA Today highlighted iRobot for offering some of "the best Black Friday deals you can get right now," focusing in particular on $100 discounts being offered on Roomba 980 and Roomba 690 robotic vacuums.
Great news, right? These lower prices are sure to draw in more customers -- the more so since the deals are so attractive that they're winning iRobot free advertising from one of the most widely distributed newspapers in the country. And yet, citing comments from analysts at Piper Jaffray, TheFly.com reported Wednesday that these discounts may be the reason iRobot shares are suffering. After all, while lower prices may help to boost sales at iRobot, those sales won't be as profitable as they might have been without the discounts.
And yet, might that not be what iRobot is aiming for -- more sales, regardless of the cost?
After all, according to Yahoo! Finance data, Wall Street analysts have been telling investors to expect 49% annualized sales growth out of iRobot this quarter -- but more than a 50% drop in profits. That being the case, there may be more danger of investors punishing iRobot for "missing" its sales number this quarter than its profits number (the bar being lower for profits). This, in turn, could be providing iRobot with an incentive to goose sales at the cost of profit margins.
The fact that iRobot got punished today anyway -- despite doing its best to meet analyst expectations -- may simply be a case of Catch-22.