Investors in Robotic vacuum maker iRobot (IRBT -1.43%) have experienced a whirlwind of results over the past five years. After an initial surge of euphoria, the news and results have been unrelentingly negative since shares hit an all-time high in early 2021. Long-term believers in the company, as well as opportunistic investors looking for deep value stocks, have been eying shares as they declined to single digits in the wake of the company's failed acquisition by Amazon.
iRobot's most recent quarter, while definitely negative, showed enough positivity for some investors to see a glimmer of light at the end of the tunnel. A final determination of whether to buy shares, under the assumption that they have hit a hard bottom, should be made based on the current state of the company as well as a reasonable projection of the future.
What went right for iRobot in Q2 2024
On the face of it, very little of a positive nature came out of iRobot's fiscal second quarter, ended June 29. Sales were down, gross and net profits were down, cash on hand was down, and free cash flow was negative. On the plus side of the ledger, the company reported that it had reduced headcount by 35%. In addition to this, iRobot also launched a new product, the Roomba Combo 10 Max robot + AutoWash Dock. The company has stated from the beginning of its restructuring that product innovation must continue even in the face of cost reductions; this product release demonstrates management's ability to balance those two goals.
What's still a problem for iRobot after Q2
While the new product launch was good news, as was the widespread distribution of another recently released product, the Roomba Essential, other results offset the positivity of these highlights. Chief among the negative developments is the reduced selling volumes and selling prices for iRobot's products. Sales of mid-tier and premium robots represented 76% of the company's sales compared to 84% for the comparable period in the prior year. In essence, consumers are favoring lower-priced robots, and buying fewer of them to boot, which is impacting margins and profitability.
Where does iRobot stand as an investment right now?
So, how should investors respond to these developments at iRobot? Caution is still called for; it may well be the case that the company is solving many of its difficulties and that the bottom is in at this point. But, it may also be the case that iRobot has more downside ahead. Traditional valuation metrics, especially those often used in value investing, are difficult to assess since the company is showing operating losses.
| Ticker | Price-to-earnings | Price-to-free cash flow | Debt-to-equity | Price-to-sales |
|---|---|---|---|---|
| IRBT | -- | -- | 1.16 | 0.24 |
Data source: YCharts. -- indicates a negative value.
From a price-to-sales perspective, the company is definitely cheap. However, iRobot's long-term debt situation makes it difficult to justify buying shares at this point in time; the danger of being early and wrong could be catastrophic. Historically, iRobot carried no long-term debt, which made it easy to be an investor: There was little downside and high upside. However, the company borrowed heavily in order to stay afloat while it made changes to its business model and reduced operational costs. The problem is that iRobot is scheduled to make debt payments of over $200 million dollars in the next three years. Since the company was already bleeding cash before these payments began, it is easy to imagine a protracted cash crunch culminating with the company being unable to meet its obligations. A glimmer of hope on this front is that in the second-quarter earnings release, iRobot projects a small positive cash flow beginning in the third quarter of 2024.
Given the risks relating to declining sales volumes, sales prices, and the debt situation, investors should hold off on new share purchases until the company demonstrates a true bottom in operations. Positive operating cash flow or stabilization in sales volumes and selling prices would demonstrate this, giving investors a reasonable hope that iRobot will not only stay in business, but also return to growth and profitability.
