Shares of autonomous vacuum cleaner company iRobot(NASDAQ: IRBT) were up 12.3% during May, according to data provided by S&P Global Market Intelligence. While that was enough to outpace the nearly 5% for the S&P 500, shareholders might still be disappointed with the final outcome of the month considering the stock was up more than 50% at one point.
It's hard to pinpoint the biggest factor that sent iRobot up more than 50% in early May but it was possibly the news of its new CEO. Earlier this year, founder and former CEO Colin Angle stepped down, noting that someone else was needed who knew how to turn around a business. On May 7, the company hired Gary Cohen as its new CEO.
iRobot needs a turnaround, and financial results for the first quarter of 2024, also released on May 7, illustrate some of the problems. The company's revenue fell 6% year over year and it had positive cash from operations of $1 million -- those numbers don't seem frightfully bad in isolation. But iRobot only had positive cash flow because it received $75 million from Amazon when its planned acquisition of the company fell through.
Put another way, iRobot's revenue is dropping and it would have burned through significant cash without a one-time breakup payment. And that's pretty much what the company expects for 2024. Revenue is expected to drop and the company believes it will have a $32 million to $44 million operating loss.
So while investors were excited at the possibility of an iRobot turnaround, a dose of reality threw cold water on that enthusiasm.
One problem it needs to fix now
On the bright side, iRobot is still a well-known brand and it expects to do over $800 million in revenue this year. That's still a large business for new CEO Cohen to work with as he turns things around.
One of Cohen's first tasks will be fixing iRobot's gross profit margin problems. There was a time when $800 million in revenue would have been profitable for the company. But its gross margin has steadily slipped for a few years, making profitability impossible right now. That needs to change.
IRBT Gross Profit Margin data by YCharts
What it means for shareholders
As a shareholder myself, I would encourage others to prepare themselves for volatility. May was volatile with a big swing up followed by a steep slide. In short, iRobot is facing really big challenges -- competition is fierce, consumers are stretched thin, and its sales and margins are consequently falling.
Shares of iRobot trade at a pretty cheap price, so the smallest bit of encouraging news can send the stock soaring. But it's still facing an uphill climb, which can discourage long-term investors from holding tight. So this stock could whipsaw until the business has more stability.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jon Quast has positions in iRobot. The Motley Fool has positions in and recommends Amazon and iRobot. The Motley Fool has a disclosure policy.
