What happened

On another down day for stock markets, with the Dow off 3% and the Nasdaq down 0.3%, shares of "machine vision" specialist Cognex (CGNX 0.96%) saw its shares fall more than most -- down 9.6% by the time the closing bell rang.

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Image source: Getty Images.

So what

Cognex shares have had a couple of rough days. On Friday, StreetInsider.com reported that analysts at R.W. Baird lowered their price target on Cognex by about 17% to $39 a share.

Cognex survived that cut all right, closing Friday trading above $42. But today, Morgan Stanley cut Cognex even deeper, setting a price target of $36, and officially downgrading the stock to underweight.  

TheFly.com notes that Morgan Stanley justified its downgrade by saying the stock has a high valuation but profit margins that are declining over time.

Now what

Morgan Stanley's criticism has merit. Valued at a market capitalization of $6.6 billion, Cognex stock sells for more than 32.3 times trailing earnings. Valued on free cash flow, the stock is a bit cheaper -- about 28.5 times FCF. That still seems a bit high, however, given that analysts who follow the stock on average only forecast 17% long-term earnings growth for the company. Moreover, data from S&P Global Market Intelligence confirms the slide in margins, with operating profit margins declining from nearly 34% two years ago to just over 27% in 2018, and then less than 20% in 2019.

Combined with a 10% year-over-year decline in revenue last year, that seems a trend more destined to result in declining earnings than rising ones. Analysts and investors are right to be cautious on Cognex.