Does The Sharp Decline In iRobot’s Stock Present An Opportunity?

Shares of home robotics company iRobot (NASDAQ:IRBT) tanked more than 30% late last week despite it reporting strong performance figures for the last quarter of 2017. The sell-off was largely triggered by lower-than-expected guidance for full year 2018. While the weak earnings guidance was certainly bad news, we believe that investors overreacted to the news and the stock currently looks oversold.

The primary reason for our belief is that iRobot’s strategy of growing its market share by incurring higher costs in the near term should yield strong returns in the long run. iRobot has a commanding market share in the growing home robotics space, and it is critical for the company to increase its presence to keep a growing list of competitors at bay. As a result, the company is looking to spend more in 2018 to get its autonomous room vacuum cleaners and floor moppers into more homes – explaining why iRobot’s revenue guidance for 2018 was higher than what investors expected even though the EPS figure was much lower. Additionally, we believe that the company’s decision to introduce new products to complement its existing Roomba and Braava range of products should also give it an edge over competitors.

Keeping all these factors in mind, we estimate a price estimate of $77 for iRobot’s shares. Our estimate is based on a simple interactive model that includes our forecasts for key operating metrics for the company, as summarized below:

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