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Why Cognex Shares Fell Nearly 20% in May

By John Bromels - Jun 10, 2019 at 9:04AM

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The stock market punished the company for weak guidance.

What happened

Shares of machine vision specialist Cognex (CGNX 0.73%) fell 19.5% in May, according to data provided by S&P Global Market Intelligence, as fallout continued from the weak guidance the company delivered on April 29. Prior to the announcement, shares had been soaring year to date, up 42.1% through April 28. Currently, the company is sitting on about a 14.7% gain for 2019, roughly even with the S&P 500.

So what

Although Cognex reported solid numbers for Q1 2019, founder and Chairman Robert Shillman admitted in a statement that "slower business conditions have dampened our expectations for growth in the near term."

Falling stock chart superimposed over columns of blue numbers

Image source: Getty Images.

Specifically, in two of the company's key end markets -- consumer electronics and automotive -- spending is slowing down. Consumer electronics companies, including cellphone manufacturers, are cutting back on investments in automation and machine vision. Meanwhile, the Chinese automotive industry has been experiencing a slowdown as well, and auto manufacturers across the globe are cutting back on capital spending. 

Although Cognex doesn't usually give full-year guidance, CEO Rob Willett projected on the earnings call that 2019 revenue would come in between $766 million and $806 million -- better than 2017 but worse than 2018. Naturally, that wasn't what investors were hoping to hear, and they began selling off the stock. 

Now what

Although Cognex may not be expected to outperform in the near term, the long-term trend toward increased automation across many different sectors should benefit the machine vision specialist. That said, it's a marathon, not a sprint, and any buyer should expect short-term weakness to hold down share price growth. However, with valuation metrics like price to earnings and price to free cash flow at or near two-year lows, long-term investors may want to consider initiating a position.

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