1 Undervalued Growth Stock That Could Soar in 2022

The stock of machine-vision company Cognex (CGNX 0.95%) has been severely beaten up in the sell-off of technology stocks in 2022. However, a couple of things about its recent results strongly suggest the sell-off was unjustified and that the stock has a lot of upside potential this year. Here's the lowdown.

Cognex outstrips expectations

There are two key takeaways from the earnings report:

• Cognex's revenue and margin performance beat management's prior expectations in the fourth quarter. More importantly, one of the reasons for it -- improvement in delivery times of crucial supplies and inventory -- is a cause for optimism for 2022.
• The results confirmed Cognex has plenty of potential within its end markets in 2022, including electric vehicle (EV) and logistics spending.

Supply chain issues

It's no secret that most of the industrial sector battled supply chain pressures over the winter. The issues have been evident since the fall of 2021 and were exacerbated by the resurgence of COVID-19 cases. As a result, many companies reported revenue shortfalls in the fourth quarter during the recent earnings season.

Fortunately, Cognex managed to buck the trend. Back on the third-quarter earnings call, management called for fourth-quarter revenue of $210 million to $230 million, with gross profit margin in the low 70% range. But the actual fourth-quarter earnings and revenue came in at $244 million with a gross margin of 72%.

Cognex's machine-vision solutions help build EVs, batteries, and tires. Image source: Getty Images.

When discussing why revenue came in ahead of expectations during the earnings call, CEO Rob Willett said Cognex saw an "improvement in our delivery times" due to engaging its suppliers intensely and also investing in getting "short-supply chips" into its inventory for use in its products.

While there's no guarantee that conditions won't get worse, and management expects supply chain issues to persist in 2022, the fact that Cognex is outpacing its expectations on the matter is positive. It's also a demonstration of the company's determination to win market share and orders with key customers that could end up making multiyear orders.

But above all, it's refreshing to hear of a company beating expectations because it took timely action to increase its inventory in preparation for potential supply chain disruptions. Contrast this with Goodyear, which recently told investors it needed to spend $300 million on working capital in 2022 to increase inventory in line with historical norms.

End-market improvement

It's helpful to break out Cognex's revenue by end market because all four have attractive prospects in 2022.

Cognex's fast-growing logistics revenue has benefited from the pandemic as customers accelerated investments in e-commerce facilities and bought Cognex's machine-vision solutions and barcode readers. Management expects growth to moderate in 2022 from the torrid level of 2021, but long-term prospects remain excellent.

Image source: Getty Images.

The return to growth in automotive is "primarily being driven by investment in EV and new vehicle development, whether it's hybrid or EV," according to Willett on the earnings call. That's a great sign because EV and hybrid car production is the industry's future. Moreover, it's not just about cars. Cognex is seeing growth from battery manufacturing and even tires for EVs (Goodyear recently announced significant investments in EV tire research & development).

Cognex's "other" markets include semiconductors, consumer products, and medical products (life science makes up around 5% of total company revenue). Given that this segment now represents 30% of its business and is growing at a healthy clip, investors should not ignore it.

Lastly, its consumer electronics end market is the wild card. Cognex usually receives consumer electronics orders in the second and third quarters as customers gear up for production in the fourth quarter. But management has little visibility into orders as they are contingent on customers' development plans for products like smartphones.

While 2020 saw a rush to produce new consumer electronics products due to demand during the stay-at-home measures, last year saw moderated spending, possibly due to the semiconductor shortage. However, that could change in 2022 as the shortage eases and customers need to invest in new models.

Data source: Cognex presentations. Quotation from Cognex's earnings call. 

A stock to buy

Trading on 38 times forward earnings, Cognex isn't the cheapest stock on the market, but its growth prospects still make it an attractive stock for long-term investors. Moreover, the markets discussed above all have the potential to generate a few game-changing orders that will dramatically improve Cognex's earnings. It happened before with Apple in consumer electronics, and it's now happening in logistics, where one undisclosed company is responsible for 17% of total company revenue.

All told, Cognex is worth buying for investors looking for a growth stock in their portfolio.