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Why Shares in Cognex Are Slumping Today

By Lee Samaha – Nov 5, 2021 at 12:50PM

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The market took a dim view of the company's earnings report, but there were some positives in it.

What happened

Shares of machine vision company Cognex (CGNX -1.37%) slumped by nearly 16% in Friday morning's first hour of trading. As of 12:46 p.m., they were still down by 14.4%.

The slide was set off by the weaker-than-expected set of third-quarter results that Cognex delivered Thursday after the close, as well as management's disappointing near-term outlook. Revenue came in at $285 million for the third quarter. That was right in the center of its guidance range of $275 million to $295 million, but its gross margin of 70% was below the bottom of the low-to-mid 70% guidance range the company gave in the second quarter.

An automated car production line.

Cognex's automotive end market is coming back nicely. Image source: Getty Images.

Moreover, management's guidance for the fourth quarter fell significantly short of the market's expectations. Management now expects revenue of $210 million to $230 million in Q4 with a gross margin in the low 70% range. Meanwhile, Wall Street analysts have been forecasting a Q4 revenue figure closer to $249 million, and Cognex's long-term target for gross margin is in the mid-70% range.

So what

Management outlined three critical reasons for the disappointing outcome:

  • The company incurred increased costs around helping a high-profile client (which management believes could place multiple orders) to deploy an installation of Cognex's technology;
  • Expenses rose, mainly due to an increase in freight and component costs in the quarter;
  • The quarter featured an unfavorable margin mix as Cognex could not ship some higher-margin products, but could fill logistics orders, which tend to have lower margins.

While the first and third issues are expected to diminish, the second is likely to intensify in the fourth quarter, CFO Paul Todgham said on the earnings call

Now what

Despite the doom and gloom, there are signs of optimism here. Cognex's automotive market (its traditional core market) is increasing its spending on the company's solutions, and the logistics market continues to grow strongly.

Cognex's other major market, consumer electronics, provided a significant headwind in Q3, and management continues to expect moderately lower revenue in 2021 compared to 2020. However, consumer electronics is always a volatile market for Cognex as its revenues from that segment often fluctuate based on the investment cycles of smartphone manufacturers and electronics companies.

Meanwhile, the supply chain issues could dissipate next year as the world adjusts to the lingering economic impacts of the COVID-19 pandemic. As such, long-term investors may see this big dip as a chance to buy some more shares and take advantage of a long-term growth story.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Cognex. The Motley Fool has a disclosure policy.

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