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 (NASDAQ:CGNX) 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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.