Cognex (CGNX 0.18%) investors recently suffered one of those horrible one-day double-digit percentage stock price falls that comes part and parcel with investing in growth stocks. It's at times like these that growth investors need to keep a clear head and focus on the long-term development of the business.
In this context, here's a look at the pluses and minuses from Cognex's latest earnings report and what it means for the stock.
Cognex's earnings disappointment
On a headline basis, Cognex's results were a little short of horrible. Revenue of $285 million came in at the midpoint of guidance of $275 million to $295 million, but the gross margin of 70% was below the guidance range in the "low-to-mid 70% range."
However, the actual damage done was in the fourth-quarter guidance:
- Fourth-quarter revenue is forecast to be in the range of $210 million to $230 million, a range implying revenue comparable to $223 million reported in last year's fourth quarter.
- Gross margin in the fourth quarter is forecast to be "in the low-70% range and below the company's mid-70% long-term target," according to the earnings release.
- The cost pressures from elevated freight and component costs are forecast to intensify in the fourth quarter.
Cognex was one of those companies unable to offset cost pressures with pricing actions. In addition, supply chain constraints are hurting its ability to fulfill orders.
These earnings results need a closer inspection
It's not hard to see why the market immediately took the stock down by a mid-teens percentage. However, on closer inspection, there are a few things here that long-term investors will like about these results.
The disappointing margin performance comes down to a combination of elevated supply chain costs (mainly freight and components) and an unfavorable margin mix. The latter is due to a couple of factors.
First, according to CEO Robert Willett on the earnings call, a strategic decision was made to provide a "higher level of support on a large deployment by a customer in logistics." Willett believes the extra cost was justified because the customer "has high potential for substantial future business with us."
The second factor comes down to supply chain constraints, meaning Cognex delayed shipping some of its higher-margin products. In addition, Cognex was able to fulfill more logistics orders than anticipated. That's good for the long term. However, since its logistics-based revenue is currently a lower-margin activity, it's bad for margin in the near term.
Putting Cognex's margin into context
Frankly, there's little Cognex can do about the elevated supply chain costs. But as a growth company trying to win a share in an emerging market, it makes sense to try to stomach the increases, provided they are temporary.
A similar argument applies to Cognex's increased costs in supporting a high-profile logistics customer. This won't be the first time the company has done this; hopefully, it won't be the last either. Casting minds back to 2014, Cognex's gross margin declined year over year and sequentially when it started fulfilling orders for a significant customer -- Apple. Investors will be happy if the result is multi-year orders similar to that achieved with Apple.
Similarly, when the supply chain constraints subside, Cognex will likely receive a margin boost as it starts shipping the higher-margin products that should have been delivered in the third quarter.
In addition, there was some good news from a strategic perspective. As a reminder, Cognex's traditional key end markets are automotive (an industry always early to adopt automation and machine vision) and consumer electronics. The third primary market, logistics, is a relatively newer growth market for Cognex.
The problem in the third and fourth quarters of 2021 is a relative shortfall in consumer electronics orders. Still, the consumer electronics market has always been lumpy for Cognex because its revenue is tied to the investment cycles of its customers. In addition, the COVID-19 pandemic and stay-at-home measures pulled forward demand and investment for consumer electronics companies in 2020, making comparisons difficult in 2021.
However, there's no let-up in the trend toward the miniaturization and increasing sophistication of consumer products. As such, Cognex's machine vision is essential in helping manufacturers fit smartphone screens, assemble micro-LED displays, manufacture smartwatches, and more.
Moreover, Willett said Cognex is "having a very strong year in automotive." That's a significant plus in a year when automakers have had to scale back production plans due to semiconductor shortages. The reason comes down to Cognex benefiting from manufacturers investing in electric vehicle (EV) assembly lines and battery manufacturing.
As such, Cognex is demonstrating that its technology will be a winner in the shift in investment from internal combustion engine (ICE) vehicles toward hybrids and EVs.
Buy Cognex on a dip?
All told, the Cognex growth story remains intact, and there are real signs of progress in logistics and automotive. However, investors will have to wait until the spring for Cognex to give a definitive update on consumer electronics. Its customers typically place large orders in the second and third quarters to gear for production in the fourth quarter, so impatient investors may want to wait a while to buy in.
Alternatively, long-term investors may well use the dip as a buying opportunity because Cognex can surprise on the upside in 2022.