Is Amazon Stock a Buy After Agreeing to Buy iRobot at a 22% Premium?

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On Aug. 5, Amazon (AMZN -0.79%) announced it was buying iRobot (IRBT 19.26%), which makes robotic vacuum cleaners including the Roomba, for $61 per share in an all-cash deal — a 22% premium to where iRobot stock traded at the time. This acquisition news understandably overshadowed the release of iRobot’s financial results for the second quarter of 2022. However, considering Q2 showed a sharp drop in revenue and profitability, perhaps this explains why iRobot is selling to Amazon at this time.

For iRobot shareholders, this is likely a disappointing finale for a stock that had so much promise, although its slight buyout premium is welcome. For Amazon, the acquisition makes a lot of sense even though it likely won’t move the needle. Here’s why.

What this means for iRobot shareholders

In Q2, iRobot’s revenue was down 30% year over year. Considering its flagship Roomba product line occupies the premium end of the robotic vacuum market, it’s possible that consumer demand plummeted due to inflation. The company’s management said retailers unexpectedly canceled orders in Q2, leading to a sharp buildup of inventory and resulting in a hefty $64 million operating loss.

Perhaps it was this slowing consumer demand that compelled iRobot to sell to Amazon at this time. Whatever the reason, it’s disappointing the stock didn’t perform better over its life as an independent public company.

iRobot had its initial public offering (IPO) nearly 17 years ago at $24 per share. Therefore, the $61-per-share buyout by Amazon means the stock will finish its public life up about 150%. Unfortunately for shareholders, the S&P 500 is up around 240% since iRobot went public, meaning this was a market-losing investment for many.

I don’t expect many changes to the Roomba experience now that Amazon owns iRobot. Roomba already had integrations with Amazon’s Alexa and responded to several voice commands. Moreover, there will be continuity at iRobot. Founder and CEO Colin Angle will remain in his CEO position after the acquisition, according to today’s official press release.

As of this writing, iRobot stock trades about 2.5% below Amazon’s offer price. If you’re looking for a low-risk way to make 2.5%, it’s an arbitrage opportunity. However, for me personally, I plan to sell my iRobot shares as soon as the Motley Fool’s disclosure policy allows and deploy that money elsewhere.

What this means for Amazon stock

Amazon wants to dominate the smart-home space and recently began pushing into consumer robotics. Late in 2021, Amazon announced its Astro product, a robot that can move around spaces and perform functions like playing music, monitoring your home, and making video calls.

Right now, Astro is available by invitation only, suggesting Amazon is still working out some kinks. And maybe that’s why Amazon wants iRobot. iRobot’s home-mapping abilities are impressive, built on years of experience. Perhaps Amazon will incorporate this technology into its Astro products, which would likely make it a better product.

However, let’s be clear: The acquisition of iRobot won’t move the needle for Amazon’s shareholders. The acquisition price is almost a rounding error for Amazon. It has over $60 billion in cash, cash equivalents, and marketable securities as of the end of the second quarter of 2022. And it generated nearly $36 billion in cash from operations over the last 12 months. Therefore, the money it’s spending on iRobot is trivial.

Moreover, iRobot has generated $547 million in revenue through the first two quarters of 2022. By comparison, Amazon has generated $238 billion over this time. In other words, iRobot’s contribution to Amazon’s business will go unnoticed due to Amazon’s size. 

Finally, Amazon’s moneymaker isn’t consumer products, it’s Amazon Web Services (AWS). So far in 2022, Amazon’s North America and international business segments have operating losses of $2.2 billion and $3 billion respectively. By contrast, AWS has an operating profit of $12.2 billion over this time.

To be clear, I would not buy Amazon stock today because of its acquisition of iRobot. Sure, the acquisition could improve Amazon’s offerings in the smart-home space, but the impact of the acquisition will likely be inconsequential when considering the size of the entire business.

That said, I do believe Amazon is a stock worth buying today because of AWS. In the first half of 2022, AWS segment revenue was almost $38.2 billion and up 35% compared to the same period of 2021 — impressive for a business of its size. Moreover, it shows no sign of hitting a growth ceiling anytime soon and it’s spitting out tons of cash flow. That’s something that can work in investors’ favor the longer they hold. And that’s why I plan to hold my Amazon stock for years to come.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jon Quast has positions in Amazon and iRobot. The Motley Fool has positions in and recommends Amazon and iRobot. The Motley Fool has a disclosure policy.

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