Lessons from iRobot's implosion

Another day, another implosion by a stock I've repeatedly warned my readers about...

And not just any stock: iRobot (IRBT), maker of the Roomba robotic vacuum, has been on my 25-stock "Short Squeeze Bubble Basket" ever since I created it at the peak of the meme-stock bubble on January 27, 2021.

I nailed the top to almost the hour – the stock hit an intraday high of $197.40 before closing at $161.16 that day (circled below), and it has been downhill ever since, as you can see from this 10-year stock chart:

I most recently warned about iRobot on November 7, 2024, writing:

[The stock] cratered 35% after reporting earnings that missed expectations and giving dismal guidance for the fourth quarter. The company expects revenue to be only between $175 million and $200 million, far below last year's $308 million, despite the fourth quarter normally having the strongest seasonal sales.

iRobot has been burning cash each year for the last four years, so unless I gained conviction that sales were going to turn around – perhaps due to the introduction of a hot new product – this isn't the kind of turnaround situation I'd bet on.

The stock closed at $6.92 that day – not far from an all-time low. That no doubt tempted some bottom-fishers, figuring it couldn't go any lower, right?

Wrong...

The stock crashed 36% yesterday to close at $4.06 after the company reported disastrous fourth-quarter earnings. Revenue fell 44% to $172 million, missing estimates of $181 million... and adjusted earnings per share was negative $2.06, worse than the negative $1.73 that analysts were expecting.

But what really tanked the stock was this line in the press release:

There is substantial doubt about the Company's ability to continue as a going concern for a period of at least 12 months from the date of the issuance of its consolidated 2024 financial statements.

This "going concern" language is often the prelude to a bankruptcy filing.

I'm not writing about iRobot to do a victory dance, but rather to show why this was always a stock to avoid. Being a successful investor in the long run isn't just about finding winners – but also avoiding blowups like this...

Let's start with a look at iRobot's historical revenue and net income. As you can see in the chart below, both have collapsed over the past four years:

The story is the same on the cash-flow statement, as iRobot has been burning cash for the past four years. The below chart of the company's operating cash flow, capital expenditures ("capex"), and free cash flow ("FCF") tells the story:

Not surprisingly, the balance sheet has followed. As you can see in this next chart, iRobot has gone from a solid net cash position to $93 million of net debt:

Why is the company doing so badly?

I think iRobot's main problem, like the 3D-printer makers before it – 3D Systems (DDD), Stratasys (SSYS), etc. – is that its once-innovative product was copied by low-cost Chinese manufacturers, which destroyed the market. Needless to say, this is likely to be a permanent state of affairs...

So why isn't iRobot's stock at pennies a share?

Well, someone might come along and buy iRobot – after all, Amazon (AMZN) initially agreed to acquire it for $61 per share in August 2022. The next year, the companies agreed to reduce the price to $51.75 per share, but then they abandoned the deal in January 2024 due to regulatory challenges in the European Union.

I don't think Amazon is likely to reemerge as a bidder. But considering iRobot's mere $124 million market cap and $217 million enterprise value (as of yesterday's close), and a cash burn of only $2.7 million last quarter, this would be a tiny acquisition for any number of companies.

So while I wouldn't touch iRobot's stock here – the most likely outcome is bankruptcy and a zero – I wouldn't short it, either...

For those of you with long memories, remember when HP (HPQ) bailed out Palm, which was headed to zero, for $1.2 billion in 2010? That was painful for short sellers...

Best regards,

Whitney

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