When the market sells off like it has recently, experienced investors go looking for bargains. And the list of stocks that are down 50% or more from recent highs is long.
One company that may draw interest is iRobot (IRBT +0.00%), which is best-known for its Roomba robotic vacuums. The stock looks cheap, but there's more to the story that should give investors pause. A few charts illustrate why both the bulls and bears can make compelling cases.
Image source: Getty Images.
The stock is historically cheap relative to sales
One method of comparing stocks is to look at the price-to-sales (P/S) ratio. It's calculated by taking the current market capitalization and dividing it by the revenue generated in the last 12 months.
It can be useful for comparing stocks in the same industry. It's also helpful to look at the same stock over time, provided the business hasn't changed too much.
It's that view that should get bulls excited. By that measure, the stock has only been cheaper at the height of the pandemic selling. Management clearly thinks it's inexpensive. The company has been buying back stock through an accelerated repurchase program.
IRBT PS Ratio data by YCharts.
But no single metric can tell the whole story, and the P/S ratio is only one perspective. Investors also have to pay attention to how much of those sales dollars fall to the bottom line.
Competition has impacted profitability
For close to two decades, iRobot had the robotic-vacuum market to itself. Sure its small circular Roomba vacuums were as popular for their use in funny animal videos as they were to consumers, but it owned the market.
That all changed in 2017, when SharkNinja launched a competing unit. Since then, the company has needed to lower prices, deal with supply-chain issues, and increase spending on sales and marketing, which has pressured profit margins.
IRBT Gross Profit Margin data by YCharts. TTM = trailing 12 months.
In the October earnings call, founder and CEO Colin Angle took a serious tone when it came to margins. He said aggressive targets for reducing the cost of manufacturing have been set for the coming year. If successful, margins might get back on track over time.
Given the uncertainty, the recent volatility will likely persist. Since the release of the SharkNinja vacuum, iRobot's stock has been up and down. It's currently down 62% from its all-time high in February of last year. Shares are only 5% higher than they were at the start of 2017.
Innovation has kept up growth
Despite the competition, the company has continued to grow sales. Trailing-12-month revenue is actually up more than 80% since the SharkNinja was released.
IRBT Revenue (TTM) data by YCharts.
That has been achieved largely through innovation. iRobot has invested heavily in machine vision to help its robots navigate common household obstacles better than the competition. And it recently formed a partnership with Bona -- the hard-surface floor cleaner -- for its cleaning solution and microfiber pads, especially designed for iRobot's jet mop. To smooth out the lumpiness of sales and entice price-sensitive customers, the company also announced a subscription service that includes, among other things, the ability to trade in the robot every three years for a new model.
It may not be the first thing that comes to mind when the word "innovation" is spoken, but living in a household with multiple pets makes this consumer far more likely to sign up for a subscription than shelling out the $1,099 up front for the most advanced Roomba. And if a subscription can work for furniture retailer RH, why not iRobot?
Worth the price
The question for both consumers and investors is, "Is iRobot worth the price?" From the consumer side, management is addressing a price disparity by making it easier to afford its products. From an investor perspective, the company looks historically cheap, has been buying back shares, and continues to invest in maintaining its technological advantage.
There are arguments for the bulls and bears. I'd like to see margins turn around and gauge the success of the subscription program before taking a position.
