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...

Robot vacuums are hot, hot, hot.

Late last year, the popularity of robo-vacs inspired Consumer Reports to devote a large chunk of one of its issues to discussion of the products, and the companies that make them -- iRobot (NASDAQ:IRBT) included. This morning, that same popularity inspired analysts at investment bank Piper Jaffray to upgrade iRobot stock.

Here's what you need to know.

Unnamed robot vacuum near staircase

This looks like an iRobot vac, but might not be -- and that could be important to iRobot stock. Image source: Getty Images.

Upgrading iRobot

On Thursday, Piper Jaffray announced it is upgrading iRobot stock one tick, from neutral to overweight. Down 8% in price over the past year, iRobot stock was trading right about where Piper Jaffray had valued it -- $63 a share. But a new review of trends in the industry convinced Piper Jaffray that an inflection point is approaching -- and that it was time to upgrade the stock and set a new price target: $78 a share, according to a write-up on StreetInsider.com (subscription required).

Rise of the robots

What trends specifically, you ask? That's an interesting story. Rather than ask the manufacturers directly to gauge demand for robotic vacuums, Piper Jaffray appears to have taken the route of polling resellers of robotic vacuums instead. After conducting its survey, Piper was surprised to discover that "multiple" vacuum vendors were out of stock on robo-vacs.

From this data, Piper concluded that robot vacuums as a class of product are enjoying "exceptionally strong demand in North America." In fact, Piper believes that the entire robot vacuum maker industry may be "experiencing a meaningful inflection in demand," reports StreetInsider.

Such demand may not be limited to North America, either. In a note covering the same Piper Jaffray report, TheFly.com relays that iRobot is increasing its advertising spending in Europe. Combined with new product introductions in the second half of this year, Piper Jaffray is predicting we will see "tailwinds" for iRobot's business that could drive sales and profits higher.

Rise of lots of robots

Piper Jaffray is detecting demand for robots in general, and it's optimistic about iRobot's business in particular, but it also mentions that iRobot rivals Neato and SharkNinja appear to be gaining market share. This could be important.

In a widely covered short report on iRobot, short-seller Spruce Point Capital warned last year that SharkNinja in particular poses a "credible threat" to iRobot, and that it's selling robot vacuums of comparable quality at much lower prices that iRobot is offering. (Shark's decision to name its most recent robot the Shark "Ion Robot" also seems -- to me -- a move calculated to create brand confusion with iRobot, and siphon away sales from the latter). What's more, Piper Jaffray's comment about Shark gaining share in the robo-vac market suggests the iRobot rivals' efforts may be bearing fruit, and robbing iRobot of sales it might otherwise be making in this "exceptionally strong" market.

What that means for investors

That's what worries me as an investor. You see, although iRobot stock has come down in price over the past year, it's still far from cheap. By my calculations, iRobot's market capitalization of $1.7 billion, minus its $166 million in cash, leaves the company with an enterprise value of just under $1.6 billion.

Against this price, iRobot stock reported $51 million in GAAP profits last year, and free cash flow of about $53 million -- resulting in near identical price-to-earnings and enterprise value-to-free-cash-flow ratios of about 30.

iRobot stock is going to have to grow its profits very fast to support these valuations -- and it might do that. According to the best guesses of analysts who follow it, iRobot stock is expected to post about a 17.5% rate of earnings growth over the next five years.

Still, that's a bit slower than the 30% growth pace I'd ordinarily want to see out of a stock selling for 30 times earnings and free cash flow. Worse, if competition from the likes of Neato and SharkNinja (and Samsung, Ecovacs, Dyson, Bissell, and all the others named in Consumer Reports' survey last year) siphons away sales growth that might otherwise have accrued to iRobot's benefit, the stock might not grow as fast as analysts are predicting.

In short, while the market for robotic vacuums may be improving, I'm still not convinced that will be enough to revive iRobot stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.