Is It Too Late to Buy Kornit Digital Stock?

Kornit Digital's (KRNT 0.82%) stock plunged 26% on July 6 after the Israeli textile printing company posted preliminary second-quarter results. It says it now expects revenue to decline 27% to 31% year over year in the quarter, which is far below the guidance for 4% to 16% growth that it presented in May.

The company also expects its adjusted operating margin to drop to negative 28% to 34%, and for its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin to slip to negative 24% to 30%. It had previously forecast an adjusted operating margin of -2% to +2% and an adjusted EBITDA margin of 0% to 4%.

Kornit is scheduled to post its full second-quarter report on Aug. 10, but its shocking preliminary numbers indicate it's in serious trouble. Let's review what Kornit does, why its growth stalled out, and if it's a potential turnaround play.

Image source: Getty Images.

What does Kornit Digital do?

Kornit sells direct-to-garment (DTG) printers that enable apparel makers to directly print their designs onto clothes. Instead of pre-wetting a garment, printing the designs, then applying a fixation agent separately with a traditional screen-printing process, Kornit's printers perform all three steps together.

Kornit was founded in 2002 by a team of digital printing veterans who realized they could apply the principles of inkjet printers to fabrics. Kornit established a first mover's advantage in that niche market, and it's now the world's leading supplier of DTG printers, with more than 1,400 customers worldwide.

Kornit's largest customer is Amazon (NASDAQ: AMZN), which uses its DTG printers to manufacture its private-label apparel. It generated 27% of its revenue from Amazon in 2021, up from just 11% in 2020.

Kornit started trading at $12 per share in April 2015 and eventually soared to an all-time high of $176.40 last November. At its peak, Kornit was valued at $8.2 billion -- or 25 times the sales it would generate in 2021. That valuation was unsustainable, and investors turned against Kornit as rising interest rates drove investors away from pricier growth stocks. The stock closed July 6 trading at $23.46 per share.

How fast is Kornit growing?

Kornit's growth accelerated significantly in 2018 and 2019 before grinding to a halt during the early days of the pandemic in 2020. However, its business recovered quickly in 2021 as retailers scrambled to produce new clothes for a post-lockdown market, and its gross and operating margins expanded.

Data source: Kornit Digital. Net of warrants. *Non-GAAP basis.

During Kornit's fourth-quarter earnings report in February, CEO Ronen Samuel said the "megatrends that have been fueling our business are intensifying" as "broken" textile supply chains highlight a growing need for the company's digital on-demand printing solutions.

Samuel called 2021 a "pivotal year" for Kornit's business and said he expected 2022 to be "one of the busiest and most exciting years" for the company with "strong growth and a remarkable pipeline of ground-breaking new product introductions." He also said Kornit was "extremely confident" in its ability to generate more than $1 billion in annual revenue by 2026. To achieve that goal, Kornit would need to grow its revenues at a compound annual growth rate (CAGR) of 25% between 2021 and 2026.

Can Kornit still reach its revenue goal?

But Samuel's tone changed completely during Kornit's preliminary second-quarter release on July 5. He blamed the abrupt slowdown on the "recalibration of e-commerce growth" in a post-lockdown market, "macro headwinds," and the delayed completion of customer production facilities.

Samuel said he expects that slowdown to "continue for the near term," but he also believes "the industry will continue its long-term secular growth" and that Kornit can "successfully navigate this near-term volatility."

Analysts now expect Kornit's revenue to decline 16% to $272 million this year as its net income and adjusted EBITDA both turn negative. But in 2023, they expect its revenue to rise 38% to $375 million as it returns to profitability.

Based on those expectations, Kornit's stock looks fairly cheap at just three times next year's estimated sales. But for now, Kornit will stay stuck in the same rut as Amazon, its e-commerce peers, and most apparel retailers face macro challenges.

It's not too late to buy Kornit Digital

Kornit's stock probably won't rally anytime soon, but its downside potential should be limited at these levels. Its dependence on Amazon is a bit worrisome, and it faces a growing number of competitors in the DTG market, but it could still have plenty of room to expand as apparel makers abandon traditional screen-printing methods. Chasing Kornit was a bad idea last year, but it might be a decent speculative bet now for investors who can stomach the volatility.