Patent lawsuits, tariff costs, pressure on margins coming from fierce pricing competition. It's not been an easy year for iRobot (NASDAQ:IRBT). That said, the stock is now down more than 45% in 2019, and much of the bad news will already be priced in. Therefore, many investors will be looking at the stock as a potential value investment. Is there a good case for buying iRobot stock? Let's take a closer look.

What management said

Two major clues toward the growth stock's near-term prospects have been given recently. The first comes from what management outlined on the recent third-quarter earnings call. CEO Colin Angle discussed how the company attempted to raise prices in the U.S. on its robotic vacuum cleaners (RVCs) in order to offset the cost increases associated with the 25% tariff rate.

A robotic vacuum cleaner.

iRobot is hoping robotic vacuum cleaners can replace nonrobotic vacuum cleaners. Image source: Getty Images.

Quoting directly from Angle:

[W]e raised prices on most of our RVC lineup in late July. Most competitors, however, opted to absorb the tariffs and kept prices static. Subsequently, we experienced greater demand elasticity than we expected, which resulted in sub-optimal sell-through in August and September.

In plain English, this means the company does not have as much pricing power as management might have previously assumed. As a consequence, Angle claimed the company lowered prices back to "pre-tariff levels," and this "appears" to have improved sales.

To be clear, a reduction in pricing power is a very big issue when you consider that iRobot had 82% market share in the U.S. RVC market in 2018 -- in fact, iRobot is one of the biggest robotics companies in the world. In other words, as the category leader and dominant player in the RVC market, iRobot's margin could come under pressure from competitors stepping up competition. For reference, iRobot's RVCs (called Roomba) generated 91% of sales in the first nine months, with robotic mops (Braava) contributing the rest.

iRobot robotic vacuum cleaner market share

Data source: iRobot presentations.

In addition, it's a problem when sales in the U.S. declined in the third quarter even with the benefit of a large shipment to Amazon that was pulled forward into the third quarter from the fourth -- which is concerning, because iRobot is about to enter its most important quarter.

Revenue

Third Quarter 2019

Third Quarter 2018

Change

USA

$117.9 million

$127.2 million

(7.3%)

EMEA

$93.7 million

$73.8 million

26.9%

Other

$77.8 million

$63.5 million

22.6%

Total

$289.4 million

$264.5 million

9.4%

Data source: iRobot presentations.

iRobot's patent lawsuit against SharkNinja

SharkNinja is iRobot's biggest competitor in North America, with around 10% market share in 2018. So when iRobot filed a lawsuit intended to halt sales of its Shark IQ Robot based on alleged patent infringements, the market sat up and took notice. SharkNinja's product is understood to be significantly undercutting iRobot's Roomba i7+ robot in the marketplace.

Unfortunately, the court recently denied the motion, and it looks likely that iRobot is going to face some fierce pricing competition during the holiday season and beyond. In addition, since iRobot has already, de facto, conceded that it doesn't have quite the kind of pricing power it previously thought it had, it's possible that sales and earnings projections might need to come down.

What it all means for investors

I'll cut to the chase. iRobot is facing a very difficult fourth quarter, and there are question marks around its mid-term growth prospects. It's facing pricing and margin erosion in its core geographic and product markets (the U.S. and RVCs), which calls into question some of the assumptions investors might have made about its earnings trajectory.

That said, there's still plenty of potential to grow RVC category sales as opposed to non-RVC, and its robotic mops sales grew 18% in the first nine months of 2019. Meanwhile, a relaxing of the trade war would be a major benefit for iRobot's cost base. And the company is hoping to launch its robotic lawn mowers (brand name: Terra) in 2021 -- albeit to a crowded market, with companies like Deere, Stanley Black & Decker, and Honda likely to be taking part.

The tricky bit is getting a fix on what the company's margin is likely to be if competitors slash prices in order to grab market share -- this could be the start of a long-term downtrend in margin. Investors will have a better idea after the key fourth quarter, and until then, it makes more sense to monitor the situation before buying into what still looks like a long-term growth story.