Do High-Profile Acquisitions Make iRobot a Buy?

Do High-Profile Acquisitions Make iRobot a Buy?

On Tuesday, shares of iRobot soared 17% following an upgrade by Raymond James and increased optimism surrounding Google's acquisition of Boston Dynamics. Apparently, many believe that robots are the new 3-D printers, but is this reason enough to buy?

Two big companies making headlines with robots
There is a belief on Wall Street that artificial intelligence as an industry is starting to gain momentum. In the last six months, Google has acquired eight different robotic companies, and investors have speculated that these acquisitions could take Google into the next phase of its growth. We already know of self-driving cars in California, powered by Google, and many believe these robotic acquisitions include patents and technology that can be used for such endeavors.

Amazon created waves earlier this month when it announced plans to use drones to deliver goods and robots in its warehouses to lower costs. When two of the most disruptive and innovating companies of this century begin to discuss robotics, it's natural that investors would gravitate to the best option available for trading: iRobot.

An unclear plan for robots
In the last two years, strong growth and demand for 3-D printers drove shares of 3D Systems and Stratasys to market-leading returns. But as of now, robots have not yet seen the same fundamental growth that drove the 3-D industry. Instead, it's the involvement of Google and Amazon that's driving interest.

Keep in mind that Google has announced no plans for its new acquisition of Boston Dynamics. We have no idea how the company will monetize or utilize the technology from this acquisition -- or its seven other acquisitions.

We do know that Google has no plans to continue Boston Dynamics' military contracts when they expire. Those make up a large chunk of the company's sales. With no clear indication of Google's plans, its purchases should not serve as a catalyst to invest in robotics.

Amazon is a company that's grown nearly three-fold since 2009 and has gone from the worldwide leader in books to a diversified company with product offerings in merchandise, groceries, and even cloud-computing. Robotics is likely one more tool in the shed for Amazon, but not a focal point for future performance.

What about iRobot?
Then, we come back to iRobot. Its stock has soared nearly 100% in 2013 and has seen a sudden boost in sentiment. Is iRobot a good investment opportunity?

Given the interest from Amazon and Google, many see iRobot as an acquisition target. However, the company's primary products are in vacuuming and mopping robots, which do not seem to fit for either Google or Amazon. There's also been some speculation that iRobot will profit from Boston Dynamics's exit from military contracts, and that this is reason to invest.

This is one space where iRobot might thrive, as defense/security accounted for only 8% of the company's revenue in its last quarter. However, like 3-D printing, there are many small private robotic companies, and many divisions within the military that have their own robotic businesses. The fact that iRobot's defense/security revenue has fallen 39% year over year might show that its products are second-tier or not preferred in this specific space.

Explore the risks, then make an investment decision
As an investor, it is good to explore risks, and there are a lot with iRobot. However, not everything's bad -- iRobot is expected to grow sales at a 13.6% rate in 2014. The majority of this growth will come from new product offerings in the consumer space, including new mopping and vacuuming robots.

The company is also still in its infancy, and it does not have a large number of products. There is still room to mature if this space sees accelerated growth.

This makes iRobot a good stock to watch. It trades at just two times sales, which is not expensive. If margins and revenue continue to improve, then iRobot will become a good investment opportunity. But at this point in time, there is a lot of uncertainty. Investors must take this into consideration before buying on expectations that it is a great momentum stock.

The bottom line
Interest in robotics from Amazon and Google is great for the industry, but might not have any meaning for iRobot, a stock that has clearly traded higher following high-profile acquisitions. Be careful in chasing these gains.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends, Google, and iRobot. The Motley Fool owns shares of and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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