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Why iRobot Corporation Stock Dropped 9% Today

By Rich Smith - Sep 6, 2018 at 5:18PM

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Sidoti doubts the stock's a bargain.

What happened

Shares of Roomba maker iRobot ( IRBT -1.82% ) closed down 9.1% on Thursday, close to their low point of a 9.5% decline earlier in the day.

If that sounds like a curious reaction to iRobot's announcement that it has invented a Roomba that can empty its own dustbin, well, it is and it isn't. Most likely, the reason this stock is down today has nothing to do with iRobot's new "Roomba i7+" vacuum. Instead, it's a downgrade from Wall Street that really sucks for investors.

A Roomba vacuum on hardwood floor

iRobot makes vacuums to keep your floors clean -- but it was iRobot shareholders who got taken to the cleaners today. Image source: Getty Images.

So what

This morning, analysts from equity research firm Sidoti & Company announced they're cutting their rating on iRobot stock from buy to neutral.

The reason for this, as explained by today, boils down to valuation. Up 19% over the past year, iRobot stock hasn't really run away from the S&P 500's performance, which is up 17% itself. Nonetheless, Sidoti seems to think that 52 times earnings is too much to pay for iRobot stock, which most analysts believe will grow earnings at only 20% annually over the next five years.

Now what

Is Sidoti right about that? Maybe.

Historically, iRobot has often carried high valuations. Still, according to data from S&P Global Market Intelligence, the stock's average multiple to earnings over the past five years has sat significantly below where it is today -- about 35.5 times earnings, to be precise. If iRobot stock should ever decide to revert to its mean valuation, that would imply about a 33% decline in share price.

No wonder investors are nervous.

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.

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