The market was left slightly underwhelmed by Cognex's (NASDAQ:CGNX) recent first-quarter earnings report. The results themselves were good, and the second-quarter outlook was good, but the full-year outlook in Cognex's biggest industry, consumer electronics, could have been better.
Still, there was some positive news on Cognex's other end markets. Does it all add up to make the stock a buy?
Cognex's first quarter
The company's recent earnings resulted in the highest revenue and earnings for a first quarter in the company's history. Revenue rose a whopping 43% from the same period last year to $239 million. Moreover, management expects revenue of $250 million to $270 million in the second quarter, representing year-over-year sales growth of 54%. Clearly, Cognex is recovering strongly from the pandemic-hit year of 2020.
Still, if it's priced like a growth stock, then it should behave like a growth stock, and investors were left slightly disappointed by CEO Robert Willett's guidance on Cognex's consumer electronics end market. "For 2021, we believe revenue for consumer electronics will be modestly below the level we reported last year," he said. For reference, Cognex's big quarters for consumer electronics tend to be in the second and third quarters as companies gear up for production in the fourth quarter. That's why the outlook on the first-quarter earnings call in May tends to set the tone for the year.
Why investors shouldn't worry too much
The outlook for lower consumer electronics sales in 2021 is not what you would usually expect from a growth company, and it raises fears that the company's long-term growth might not be quite what the market is expecting.
However, it's worth taking a step back and putting it all into context. I have the following four points for consideration:
First, Cognex's consumer electronics revenue always bounces around, so the guidance for 2021 should definitely not be taken as some trend. Cognex's machine vision solutions are used to "guide, identify, gauge, [and] inspect" automated processes.
Cognex's consumer electronics revenue is largely subject to the timing of the capital spending plans of its major customers. Some of them include smartphone manufacturers using machine vision to monitor the fitting of screens on mobile phones. As such, it's natural to expect some volatility. Indeed, consumer electronics revenue rose 30% in 2020 as manufacturers geared up for production, and they will likely grow strongly again in the future as customers prepare for new products.
Second, the company has introduced three new product platforms in 2021, and they are likely to open up new markets. The In-Sight 3D-L4000 smart camera system is viewed as a "breakthrough product" that will expand Cognex in the industrial 3D vision market. Management believes Cognex currently has a 5% share of a 3D market worth some $400 million. Meanwhile, a new generation of Dataman handheld barcode readers has been released. Finally, Cognex Edge Intelligence is a new solution that analyzes the huge number of images produced by Cognex's machines.
Logistics and automotive
Third, the logistics market is on fire thanks to the surge of investment in e-commerce due to lockdown measures accelerating the growth of online shopping. Management thinks it can grow its logistics revenue by 50% a year, and the estimated addressable market is $1 billion. Fortunately, there's no sign of the market slowing down, and the torrid rates of growth mean that, for the first time, logistics was Cognex's biggest end market in the quarter.
Fourth, there are real signs that Cognex's automotive-based revenue can grow strongly as manufacturers shift investment toward electric vehicle production lines. It's always concerning when an industry makes a structural shift, and that's what appears to be happening right now around the investment patterns of the automotive manufacturers.
Willett noted that, " ... we've seen the automotive business globally accelerate faster than we expected in recent months and particularly around electric vehicles. ... And the investment is more around electric vehicles, and we're also seeing some larger capital projects coming in."
These comments indicate that Cognex's machine vision solutions will be at least as important to electric vehicle production as they are to internal combustion engine production. That's a great sign for the future.
Is Cognex a buy?
Cognex faces some near-term headwinds -- the semiconductor shortage is constraining automotive production, and consumer electronics is set for lower revenue in 2021. Still, the long-term outlook continues to be bright, and Cognex is set for 22% revenue growth in 2021 overall.
All told, the stock continues to look like a good investment option for long-term investors, but it's not a stock for the impatient or those who can't handle volatility.