Is iRobot Stock a Buy?

iRobot (IRBT 3.13%) burned a lot of investors back in 2019 when its stock price plunged nearly 40% amid slower sales of its cleaning robots and rising tariffs on Chinese goods.

But in 2020, its stock price rebounded nearly 60% as its revenue growth rose through the pandemic, its margins stabilized, and it was granted an exception from tariffs through the end of the year.

Let's weigh the bull and bear cases to see if this volatile stock will head higher in 2021.

Image source: iRobot.

How fast is iRobot growing?

iRobot generated 89% of its revenue from its Roomba vacuums in the first nine months of 2020. The remaining 11% came from its Braava mopping devices. Its total revenue rose 12% year over year during those three quarters. Let's take a closer look at its revenue growth throughout 2019 and 2020:

Source: iRobot. YOY = Year over year.

iRobot's business took a big hit in the first quarter, when the pandemic disrupted its supply chains and shut down retailers. But those headwinds waned in the second quarter, and robust demand for cleaning products during the ongoing crisis boosted its sales.

Those tailwinds accelerated in the third quarter and were amplified by the North America launches of its new premium Roomba i3 and i3+ robots, which feature three-stage cleaning, personalized cleaning routines, and self-emptying capabilities (in the i3+). As a result, iRobot's revenue from its premium robots (which cost over $500) rose 86% year over year and accounted for over 60% of its top line.

In the first nine months of 2020, iRobot's average gross selling price per robot rose year over year from $306 to $311. Its non-GAAP gross margin dipped from 48.9% to 47.2%, but tighter cost controls boosted its operating margin from 12.6% to 13.5%. Its net income more than doubled year over year.

But can it maintain that momentum?

iRobot didn't provide any guidance last quarter, but it faces three potential challenges. First, its temporary reprieve from tariffs in 2020, which reduced its gross and operating margins by 3.1% in 2019, expired at the beginning of 2021 after being extended for four months last August.

Those tariffs will likely be reinstated and throttle iRobot's margins again, even though it's reducing its dependence on Chinese manufacturers by ramping up its production capabilities in Malaysia. It expects that shift, along with tighter cost controls and higher direct-to-consumer sales, to cushion the blow of the incoming tariffs. Second, iRobot could face tough year-over-year comparisons after the pandemic ends.

Lastly, iRobot still faces competition from a wide range of similar devices, which either cost less, offer more features at comparable prices, or aim higher in the premium market. Its notable competitors include Xiaomi's (XIACF 1.46%) Mi Robot vacuum, Samsung's robot vacuum, and Dyson's high-end 360 Heurist vacuum.

However, iRobot still enjoys a first-mover's advantage in this market, and new products like its autonomous mower Terra and the iRobot Genius Home Intelligence Platform -- which tethers all its devices to a single Wi-Fi platform -- could widen its moat against its challengers.

The valuations and verdict

Analysts expect iRobot's revenue and earnings to rise 13% and 19%, respectively, in fiscal 2020. But in 2021, they expect its revenue to rise just 7% and for its earnings to drop 40% on slower sales and higher tariffs.

iRobot's stock isn't cheap at about 46 times next year's earnings, and the near-term headwinds should prevent it from replicating its impressive gains from last year. iRobot is still an innovative company that leads its niche market, but there simply aren't enough catalysts to make it a compelling investment right now.