Improved Revenues Required Before iRobot Corporation (NASDAQ:IRBT) Stock's 32% Jump Looks Justified

iRobot Corporation (NASDAQ:IRBT) shares have continued their recent momentum with a 32% gain in the last month alone. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 77% share price drop in the last twelve months.

In spite of the firm bounce in price, considering around half the companies operating in the United States' Consumer Durables industry have price-to-sales ratios (or "P/S") above 0.8x, you may still consider iRobot as an solid investment opportunity with its 0.3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for iRobot

What Does iRobot's P/S Mean For Shareholders?

iRobot hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on iRobot.

How Is iRobot's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as iRobot's is when the company's growth is on track to lag the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 13%. This means it has also seen a slide in revenue over the longer-term as revenue is down 51% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to slump, contracting by 9.6% during the coming year according to the three analysts following the company. With the industry predicted to deliver 5.0% growth, that's a disappointing outcome.

In light of this, it's understandable that iRobot's P/S would sit below the majority of other companies. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

The latest share price surge wasn't enough to lift iRobot's P/S close to the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that iRobot's P/S is on the lower end of the spectrum. As other companies in the industry are forecasting revenue growth, iRobot's poor outlook justifies its low P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for iRobot that you should be aware of.

If these risks are making you reconsider your opinion on iRobot, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.