Despite operating in the industrial sector, Cognex (NASDAQ:CGNX) offers investors software-like margins, boasting a gross profit margin of 76% and a profit margin of 31% as of its most recent quarter. Thanks to these margins, Cognex has always given ample funding to its research, development, and engineering department, making innovation the company's main growth engine.

With this focus on innovation, Cognex is not your traditional industrial manufacturing company and offers investors uniquely profitable exposure to a historically low-margin industry. Today, Cognex has two specific growth avenues in its crosshairs, as it looks to build upon its booming logistics segment and its companywide deep-learning and Edge Intelligence applications. Let's take a look at how these emerging technologies could mean big business down the road for the machine-vision specialist. 

Two warehouse workers wearing masks compare packages to an order sheet.

Image source: Getty Images.

Cognex brings machine vision to life

Incorporated in 1981, Cognex develops machine-vision products designed to automate various manufacturing and distribution jobs that would otherwise require human oversight. Operating in one lone segment, machine-vision technology, Cognex serves a variety of markets, including electronics, automotive, logistics, and even life sciences.

With customers ranging from major automotive manufacturers to smartphone makers, and any type of production company in between, the company's products help guide, inspect, gauge, and identify goods and raw materials worldwide. In fact, thanks to its quickly growing logistics line, Cognex gets to take two bites of the apple in a sense, as its products are not only used by the manufacturer, but also by the e-commerce company that sold it, where its products provide assistance logistically.

The logistics market leads the charge

Led by sales to its e-commerce customers, logistics has quickly grown to account for over 20% of the company's overall revenue, helping buoy the stock's performance during the pandemic. In fact, logistics has grown to become Cognex's largest market much faster than management expected and now represents the largest portion of the company's sales. Having grown revenue year over year by more than 30% for each of the last four quarters, it's clear to see that logistics is firing on all cylinders.

Additionally, the logistics segment is transitioning its solutions from customizable to more straightforward, standardized offerings. Speaking to this point on the company's second-quarter earnings call, CEO Robert Willett said: "These standard solutions are easier to deploy and require less hands-on engineering support from Cognex. We believe this will enable us to scale more easily and report higher gross margins in logistics over the long term."

Since the company already has gross profit margins of 75% and logistics set to become an outsize portion of the business, this transition could act as a significant profit driver for the next few years.

Over the long term, management expects the logistics market to grow by 15% annually, highlighting that the company's mere 10% share of the market leaves a massive opportunity.

High growth prospects

While logistics steals the show with its immediate growth potential, Cognex has some previously small bets that are becoming promising growth avenues. Management expects its new deep-learning products to grow by 70% annually for the next few years, prompting Willett to say that the company's stretch goal for the segment is 100% growth over the same time frame.

Pairing with the company's burgeoning deep-learning capabilities is its continued development of Cognex Edge Intelligence, which acts as an Internet of Things solution for its customers. By enabling real-time decision-making from data on the floor, many customers rely on the product to streamline operations and improve overall efficiency. While management has not yet begun giving specific metrics on this area of the business, it is vitally important to watch Edge Intelligence's development as it holds potential to become a common offering to almost any customer.

These two machine-learning product lines offer major long-term growth potential and sticky sales from companies that move into the Cognex ecosystem.

A bellwether in the making?

Despite crushing the S&P 500's return over the last decade with its stock up 1,000%, Cognex still only has a 20% share of what it estimates to be a $4.2 billion market. This history of innovation and proven success, paired with its small overall market share, is the best of both worlds for investors looking for long-term growth. For manufacturers and logistics companies to operate profitably in today's complex world, automation is now more a must have tool rather than just a helpful tool. Thanks to the company's diversification across many industries and its booming e-commerce operations, Cognex is quietly becoming a bellwether in the automation space.