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Contract Loss Rattles iRobot

Shares plunge after a competitor wins a huge defense pact.

Shares of robotics specialist

iRobot

(IRBT) - Get Report

plunged Monday after the company lost a lucrative defense contract to supply more than 3,000 robots to a privately owned competitor.

The five-year contract won by

Robotic FX

-- estimated at around $280 million -- required an initial delivery of 101 robotic systems and 10 spare parts kits going up to 3,000 systems and 1,000 sets of spare parts over the term of the contract.

iRobot was regarded as a front-runner in the deal, and investors clearly saw the decision as a crushing blow. The company is widely regarded as the leading supplier of military robots and it has shipped more than 1,000 PackBots, its reconnaissance and bomb-disposal robot.

"The loss of the contract to a startup suggests neither IP nor economies of scale are barriers to entry, and iRobot's sales and marketing execution may be flawed," wrote JPMorgan analyst Paul Coster on Monday. JPMorgan makes a market in iRobot shares.

Shares of iRobot were down nearly 23% to $18.20 in recent trading.

However, the selloff may be the result of a speculative shakeout instead of any change in the company's fundamentals.

While the loss of this deal could affect the competitive landscape for iRobot, it's unlikely to change its financial guidance or affect its innovative edge. iRobot did not respond to requests for a comment.

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iRobot shares had run up nearly 35% since the beginning of August in anticipation of the contract in the company's favor -- a valuation that many found unsustainable. Last Thursday, iRobot's stock closed at $24.23, almost near its 52-week high.

With iRobot set to introduce new products and embark on the path to profitability, the move lower could be bringing investors a good opportunity, say other analysts.

"iRobot is at an inflection and today's selling took a lot of risk off of the table," wrote Jesup & Lamont analyst Alex Hamilton in a Monday note. Jesup does not have an investment banking relationship with iRobot nor does it make a market in the company's shares.

iRobot's plans to introduce two new consumer electronics products at the Digital Life exhibition in New York on Sept. 27 could be a catalyst for the stock.

Last month, the company

updated its popular home vacuum-cleaning robot, Roomba, and earlier in the year unveiled a swimming pool-cleaning robot, indicating it is building a strong portfolio of consumer products.

iRobot also

raised its fiscal-year guidance during its second-quarter results in July.

But the entry of Robotic FX as a significant player could affect demand for iRobot's PackBot products. Wrote Raymond James analyst Brian Gesuale: "While this announcement does not affect our views on the company's government segment's performance this year, we see increased competition creating more uncertainty as we move into 2008." Raymond James makes a market in iRobot shares.

iRobot already seems to have anticipated the trouble from Robotic FX: It has filed two lawsuits against Robotic FX and its founder and president, Jameel Ahead, a former iRobot employee, for infringement of its patents and misappropriation and misuse of confidential information.

It could be years, however, before the litigation is resolved.

For now, iRobot's short-term future hinges on the new consumer products it plans to unveil later this month. If it can prove it hasn't lost its innovative edge, the stock could win back investors.