The Downtrend In iRobot Is Not Over

May 5, 2022 at 1:00 AM
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    The Downtrend In iRobot Is Not Over

    iRobot Moves Up On Fed “Soft Landing” Outlook 

    Shares of iRobot (NASDAQ: IRBT) have been in a steady downtrend for the last several quarters due to the mounting issues of supply chain hurdles and inflationary pressures. The biggest risk for the company and the global economy was the Fed and the Fed gave the market what it wanted, and an outlook for soft-landing. In that scenario, iRobot should be able to start regaining traction with microchips, components, shipping delays, and inflation but there is a risk. With inflation still on the rise and new data expected out shortly we see the Fed increasing the pace they just set as soon as next week. 

    In that scenario, the pressures facing iRobot may cease because demand dries up and no one wants to buy a high-priced specialty vacuum cleaner anymore. The takeaway? Because iRobot’s short interest was very close to 20% at the start of the month and the risks to business remain, it is our view the relief rally in the stock is nothing more than short-covering and a peak in prices the short sellers are likely to use to their advantage. The Q1 results were lackluster, to say the least, and do not suggest a vigorous rebound in the stock is about to unfold. 

    iRobot Has Mixed Quarter, Shares Move Lower 

    iRobot didn’t have a bad quarter but it also didn’t have the kind of quarter that warrants a 35X valuation either. The company reported $291.67 million in net revenue for a decline of 3.7% over last year. The revenue is up more than 52% in the two-year stack which is good but it missed the consensus by 350 basis points and is the second-lowest take since the pandemic began boosting demand. On a regional basis, strong gains in Japan and the US of 25% and 33% were offset by a 44% decline in EMEA. The EMEA decline is due to demand but also to the tough comp versus last year. 

    Moving down, the company experienced a significant improvement in margin due to a recent tariff exclusion but we feel that news was priced into the stock even if the analysts had not altered their targets. This led to much better than expected bottom-line results but did not offset costs and other factors resulting in a net loss for the quarter. The company reported -$0.66 in adjusted EPS which is $0.69 better than expected and enough for the company to raise its guidance. The problem with the guidance is that the revenue target was lowered while the EPS target was only modestly increased leaving the door wide open to underperformance in our opinion. 

    “While we still anticipate solid revenue growth in North America and our prospects in Japan are strengthening, we have reduced our full-year revenue growth expectations due primarily to the prospect of muted category growth in EMEA. Nevertheless, the combination of tariff-related savings and ongoing actions to carefully manage to spend will help us preserve our profitability and enable us to slightly increase the high end of our FY22 EPS targets,” says CEO Colin Angle. 

    The Technical Outlook: iRobot Is Set Up For A Fall 

    Price action in iRobot surged in the days ahead of the Q1 release but that rally may already be over. The price action is down in premarket action and has yet to break its downtrend. Assuming the market moves lower during the session and closes below the short-term EMA, we see this stock retesting the recent low and possibly trending lower. If, however, the market can support the price at the EMA or higher we may see short-covering begin and a rally unfolds. 

    The Downtrend In iRobot Is Not Over


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