Is Amazon stock bought after iRobot is approved at 22%?

on August 5 Amazon (AMZN -1.24%) announced that she was buying iRobot (IRBT 19.10%), making robotic vacuum cleaners including Roomba, for $61 per share in an all-cash deal — a 22% premium over where iRobot was trading at the time. This acquisition news understandably overshadowed the release of iRobot’s financial results for the second quarter of 2022. However, given the second quarter of the year that showed a sharp decline in revenue and profitability, this probably explains why iRobot is selling to Amazon at this time.

For iRobot shareholders, this is likely to be a disappointing conclusion to a stock that has had so many promises, although a slight acquisition premium is welcome. For Amazon, the acquisition makes a lot of sense although it probably won’t move the needle. Here’s why.

What does this mean for iRobot shareholders

In the second quarter, iRobot revenue was down 30% year over year. Given that Roomba’s flagship product line ranks first in the robotic vacuum market, it’s possible that consumer demand has fallen due to inflation. The company’s management said that retailers unexpectedly canceled orders in the second quarter, which led to a sharp backlog of inventory and led to a massive operating loss of $64 million.

Perhaps it was this sluggish consumer demand that forced iRobot to sell to Amazon at this time. Whatever the reason, it’s disappointing that the stock has not performed better during its life as an independent public company.

iRobot got its initial public offering (IPO) nearly 17 years ago at $24 a share. Therefore, a $61 per share purchase by Amazon would mean the stock would end its public life by approximately 150%. Unfortunately for the shareholders, the Standard & Poor’s 500 It’s up about 240% since iRobot went public, meaning this was a losing market investment for many.

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

As of this writing, iRobot stock is trading about 2.5% less than Amazon’s offer price. If you are looking for a low risk way to achieve 2.5%, this is an arbitrage opportunity. However, for me personally, I plan to sell iRobot stock as soon as the Motley Fool’s disclosure policy allows that money to be spread elsewhere.

What does this mean for the Amazon stock?

Amazon wants to dominate the smart home space and has recently started pushing towards consumer robotics. In late 2021, Amazon announced Astro, a robot that can move around spaces and perform functions such as playing music, monitoring your home, and making video calls.

For now, Astro is available by invitation only, which indicates that Amazon is still working on some of the kinks. And maybe that’s why Amazon wants iRobot. iRobot’s home mapping capabilities are impressive, and it’s built on years of experience. Amazon will probably incorporate this technology into their Astro products, which will likely make it a better product.

However, let’s be clear: The acquisition of iRobot won’t move the needle for Amazon shareholders. Acquisition price is almost a mistake for Amazon. It has more than $60 billion in cash and cash equivalents and marketable securities as of the end of the second quarter of 2022. It has generated approximately $36 billion in cash from operations over the past 12 months. Therefore, the money you spend on iRobot is insignificant.

Furthermore, iRobot generated $547 million in revenue during the first two quarters of 2022. In comparison, Amazon generated $238 Billion during this time. In other words, iRobot’s contribution to Amazon’s business will go unnoticed due to the size of Amazon.

Finally, Amazon’s money maker isn’t consumer products, it’s Amazon Web Services (AWS). So far in 2022, the Amazon North American and International Business segments have incurred operating losses of $2.2 billion and $3 billion, respectively. By contrast, AWS generated $12.2 billion in operating profit during this time.

To be clear, I will not be buying Amazon stock today due to its acquisition of iRobot. Sure, the acquisition could improve Amazon’s offering in the smart home space, but the impact of the acquisition is likely to be insignificant when considering the scale of the entire business.

However, I think Amazon is a stock worth buying today because of AWS. In the first half of 2022, AWS segment revenue was approximately $38.2 billion and a 35% increase over the same period in 2021 – impressive for a company of this size. On top of that, he’s showing no sign of hitting a growth cap anytime soon and he’s spitting out tons of cash flow. This is something that can work for investors the longer they hold. That is why I plan to hold the Amazon stock for years to come.

John Mackie, CEO of Whole Foods Market, an Amazon company, is a member of The Motley Fool’s Board of Directors. John Quast holds positions at Amazon and iRobot. Motley Fool has positions at Amazon and iRobot and recommends it. Motley Fool has a disclosure policy.

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