Investors in machine vision company Cognex (CGNX -0.81%) were dealt a blow following the release of the company's first-quarter earnings. The stock fell sharply afterward and is now down a whopping 38%. While there are good reasons for a realignment in the valuation following adverse events this year, it seems unlikely that anything has happened to reduce the company's long-term earnings potential by nearly 40%. So does that mean Cognex is a good value stock right now? Let's take a look.
Recapping the key events from the first-quarter earnings, it wasn't so much that the earnings were terrible in themselves. Instead, the market took umbrage with management's guidance for the second quarter and commentary on trading conditions in 2022. The second-quarter guidance for revenue of $265 million to $285 million came in lower than the market's previous estimate of $293 million. In addition, the guidance for gross margin in the low 70% range is below the company's target of mid-70%.
Moreover, CEO Rob Willett's statement on the earnings call scared the market: "While our Q1 results were good, we believe growth momentum is slowing. We are currently hearing from customers that automation projects are taking longer to deploy, and some are being delayed because of supply chain challenges and staffing shortages."
It's important to note that it's not an issue of Cognex's supply chain issues but rather its customers' issues. In fact, during the earnings call, Willett said, "Our product delivery times were mostly back to normal by the end of Q1." The key point is that Cognex is in a position to deliver when its customers start ordering again, so the question is isolated to when they will order rather than whether Cognex can meet demand.
Cognex's end markets
To shed some light on this question, it's helpful to focus on the company's three key end markets. Traditionally, automotive (an industry always at the forefront of automation adoption) has been its core market, with consumer electronics (notably smartphone production with Apple as a significant customer) following and the fast-growing logistics (e-commerce warehouse automation) making up the third.
I have a few points on all three key markets, starting with automotive. Unfortunately, global light vehicle production estimates have been taken down this year due to ongoing shortages of semiconductors and other components. The supply chain issue in the automotive industry was further impacted by the conflict in Ukraine and automakers' issues around securing copper wiring harnesses (formerly produced in Ukraine) and raw materials like palladium (used in catalytic converters) from Russia.
As such, traditional automakers are tentative about placing orders because they lack certainty around their production volumes. That said, investors should remain positive.
In contrast to caution around traditional auto manufacturing, Cognex continues to see growth from electric vehicle (EV) manufacturers, notably in Asia. The issue isn't Cognex's products but rather the temporary constraints on automakers. The reality is that machine vision has good underlying demand, as evidenced by the EV orders. The bifurcation in demand between traditional and EV automakers was made on the earnings call with Willett noting "we see strong growth in EV and EV battery and much more muted growth in traditional automotive."
Logistics and consumer electronics
Willett's commentary on logistics is a mixed bag. He told investors the second quarter "will be a quiet quarter for logistics" due to the timing of orders but "it will be followed by a more active quarter in Q3." So naturally, given the current environment, investors will only cautiously pencil in a return to form for the fast-growing logistics business in the third quarter. However, readers should note that Cognex's revenue tends to be very lumpy and somewhat dependent on when large customers decide to deploy.
Finally, on consumer electronics, while management believes consumer electronics "will be accretive to our growth rate in 2022," the fact is its products are "predominantly installed on production lines in Asia" and in particular in China. Unfortunately, given the current COVID-19-related lockdowns in China, it's tough to know exactly what Cognex's customers will do in the second quarter.
A bright future
The company is suffering near-term margin pressure due to higher costs incurred in sourcing components to deliver products -- an issue that will resolve in time. The automotive end market is likely to recover as the supply chain issues ease, and consumer electronics growth can pick up as China's lockdowns ease. Meanwhile, the logistics end market question (Will customers deploy in the third quarter?) will become apparent by the end of the second quarter.
Many things need to go right for Cognex to improve in 2022, and there's still plenty of downside risk in the near term. However, none of the company's issues speak to any long-term fundamental weakness. As a result, enterprising investors may want to take advantage of the dip here.