I love iRobot (Nasdaq: IRBT) -- I won't deny it. I'm the proud owner of two Roomba vacuums. I own iRobot stock, and I'm optimistic about the company's prospects. As such, when I saw iRobot's Q1 earnings release earlier this week, I was sorely tempted to gloss over the bad news and focus on the good:

  • Revenue rose 12% to $106 million, beating Wall Street's forecast.
  • Profits paced that growth at 12%, exceeding Street estimates and topping $0.27 per share.
  • U.S. home robot sales began to bounce back, growing (you guessed it) 12%.
  • International home robot sales grew 37%.

Then I saw Wall Street's reaction: an 8% drop for iRobot shares. What went wrong?

Error! Does not compute!
I found two big reasons for iRobot's decline yesterday, starting with the earnings beat itself. Ordinarily, when a company exceeds earnings expectations early in the year, you'd expect it to raise estimates for the rest of the year, incorporating the quarter's "extra money" into its best guess for the full year's profits. Instead, iRobot held guidance steady at about $460 million in revenue and $0.95 per share profit, which lagged Street estimates.

Second, the company suffered a serious lack of free cash flow. After generating $8.5 million in cash profits in Q1 2010, iRobot swung to a $4.5 million FCF deficit in Q1 2011. Granted, management had a good explanation for the reversal. It's building inventory to support the Roomba 700-series and Scooba 230 launches, as well as the new $230 million PackBot contract and the SUGVs it's building for Boeing (NYSE: BA) and the rump Future Combat Systems project. But still, watching inventories grow by 29% -- far outpacing sales -- is a bit discouraging.

The cash gap and inventory bloat also call into question iRobot's valuation. After rising 150% in price over the past 12 months, the shares fetch a lofty 38 times earnings today. Even with profits predicted to grow 24% per year over the next five years, that's expensive.

While I'm not happy to see investors sell off iRobot in response to the news, I can't say they're wrong. Based on these numbers, it looks like iRobot shareholders have vacuumed up all the profits they're likely to get for a while. For now, it's time to return to the base station and recharge.

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.