iRobot Is a Falling Knife That's Too Risky for Most

Investors in robotic vacuum maker iRobot Corporation (NASDAQ: IRBT) have experienced a whipsaw ride over the last five years: Shares first rocketed 375% higher early in the pandemic before plummeting 95% over the next four years. Even in this red-hot bull market, the stock continues to fall, and it may be drawing the attention of deep value or contrarian investors.

The backstory of iRobot's rise and fall

iRobot's rise is explained by the ingenuity of its primary products: robotic vacuum cleaners. Saving millions of people from the drudgery of a traditional household chore helped the company grow into a pioneering robotics company and a profitable one to boot: iRobot reported a profit for every fiscal year from 2013 to 2021. It was the proven industry leader going into the pandemic, and during the early months of the response to COVID-19, investors poured into the stock, bidding it up to record levels in little more than 12 months.

The rise in stock price coincided with the two highest revenue years in company history. However, profitability had reversed by this time, and iRobot barely broke even in the fiscal year ended Jan. 1, 2022 despite its all-time high revenue. In the midst of this deterioration in profitability, the company agreed to be acquired by Amazon . However, the deal was eventually called off in early 2024 due to regulatory scrutiny, and Amazon paid iRobot a breakup fee. In conjunction with calling off the transaction, iRobot implemented a restructuring plan aimed at stabilizing cash flow. The market has predictably sold off iRobot's shares in the wake of the failed deal, sending them to a fresh all-time low.

Details of iRobot's restructuring plans

The crux of the restructuring plan was to reduce costs and gain efficiencies throughout the product cycle. Management targeted savings through:

• Reduced spending on design and production through new agreements with suppliers.
• Reduced research and development expense.
• Reduced marketing spend.
• A smaller real estate footprint.
• The pause of all non-core product development.

These changes were expected to result in a global-workforce reduction of about 350 employees.

Q1 2024 earnings results and current investment outlook

The fiscal 2024 first-quarter earnings release was iRobot's first since the collapse of the Amazon deal and the beginning of its corporate restructuring.

Data source: iRobot. NM = not material.

Of course, the company's restructuring is still in progress, but it should be noted that operating cash flow was only positive last quarter due to the breakup fee received from Amazon.

Running traditional valuation calculations is tricky when a company has negative earnings and free cash flow (FCF). Using a trailing average of prior years helps smooth the calculations out, but even going back five years reveals a share price that's precarious at current levels. The price-to-sales ratio is an outlier, explained by the precipitous decline in the share price, and it shouldn't be treated as an indicator of fundamental value.

Data source: YCharts.

Even if an investor was inclined to take a chance at current prices, iRobot's debt situation is ominous. In the past, the company carried only minimal debt. However, in order to gain cash and working capital in the midst of its demand-and-supply mismatch, the company took out a term loan of $200 million in July 2023, of which $188.2 million was received as cash. Payments totaling $275 million are due on this term loan over the next three years. Considering the company has recently been showing operating losses (the company is losing money even before making interest payments), paying this loan back will be taking iRobot to the breaking point given its $118.4 million of cash on hand. The company must reap the savings it hopes its restructuring plan will deliver in order to make these payments, to say nothing of adding growth.

Worse for investors, the company was forced to address its going-concern assumption in its annual report for the year ended Dec. 30, 2023. While iRobot believes it will remain a going concern, part of this conclusion is based on the assumption the restructuring will succeed, which is far from certain. Given the deterioration of its business and financial woes, iRobot shares are best avoided by investors right now. Only those with a big risk appetite and the willingness to suffer substantial losses should consider buying iRobot as a turnaround play.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Joseph Arroyo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends iRobot. The Motley Fool has a disclosure policy .