With a market cap of $8.3 billion, Cognex Corporation (CGNX 0.22%) is not a small-cap company. However, it's still a growth company trying to build out the adoption of technology with explosive growth potential. As the leader in machine vision, Cognex's strategic aim is to grow into a served market (estimated as being worth $4.2 billion in 2018) that management sees as growing at a 12% annual rate. The good news from 2022 is Cognex is achieving many of its strategic aims; the bad news is almost everything seems to be working against the company right now. Here's the lowdown.
What a growth company needs
If you are going to make up an informal list of objectives for a growth company, it will include the following:
- Win over some highly prominent and visible customers to demonstrate your technology's efficacy, expand revenue, win follow-up business, and sell to lower-tier players as they follow their industry leaders in adopting machine vision.
- Ensure you satisfy high-profile customers by investing in a high level of service.
- Continue establishing your technology in new growth markets.
As alluded to earlier, Cognex is doing all three things. The company's three major machine vision markets are automotive, consumer electronics, and logistics/e-commerce. The biggest names in two of those three industries are Apple (named as a significant customer in a previous Cognex SEC filing) and Amazon.com (AMZN -0.47%). The latter was not named on Cognex's recent earnings call. Still, Cognex's last 10-K filing referred to a large customer in the logistics industry that represented approximately 17% of their total revenue. When an analyst refers to "the world's largest e-commerce customer," it's a reasonable bet that it's Amazon.
One clear thing is that Cognex has won some very high-profile customers in the last five years, so you can tick off the first box on the checklist.
Servicing customers and establishing new markets
The other two boxes can be ticked off as well. Three sources indicate that Cognex is very careful in servicing its customers (an excellent quality in a growing company). First, back in 2014, when Cognex started working on Apple orders (its machine vision solutions help smartphone manufacturers fit screens), management significantly ramped its operating expenses to support the orders. Second, it was the same in 2021, with Cognex incurring an extra cost in providing a "higher level of support on a large deployment by a customer in logistics." Third, back on the fourth-quarter earnings call in February, CEO Robert Willett disclosed Cognex had "been prioritizing delivery during this time of global chip shortages that added incremental costs in 2021, due to the significant premiums we've paid to procure components through brokers, and for expedited freight."
As for establishing new markets, the logistics market is a relatively new one for Cognex that's grown at a compound annual growth rate of approximately 50% over the last five years.
What's gone wrong this year for Cognex
Unfortunately, the best-laid schemes of mice and men often go awry, and Cognex has been hit across the board this year:
- A fire at its primary contractor site in Indonesia destroyed a "large amount" of component inventory and "was particularly disappointing given all our hard work to put us in a strong supply position prior to the fire," according to Willett in the earnings release.
- Cognex will have to pay premium prices to brokers to secure components, not least to replace those lost in the fire.
- It's well documented that Amazon is scaling back investment in fulfillment centers, and, Willett noted, there are "certain customers scaling back spending on new e-commerce fulfillment centers." Honeywell reported a similar phenomenon in its warehouse automation business.
- Consumer electronics and automotives have been challenged this year with ongoing supply chain issues and fears over consumer discretionary spending in the economy.
It all adds up to a frustrating year for the company. It's doing all the right things, but a confluence of negative factors is hurting its near-term earnings outlook. As a result, the risk around its earnings is rising, but Cognex's dip could provide a useful entry point for long-term investors who can tolerate the potential for negative newsflow.