It's been a brutal year for shareholders in machine vision company Cognex (CGNX -0.05%). The stock is down nearly 45% this year as the company's main end markets (automotive, consumer electronics, and logistics) have suffered in line with ongoing supply chain challenges and slowing consumer spending. If that wasn't enough, a fire at a primary contractor damaged Cognex's inventory of components; the last thing needed in the current environment of component shortages. That said, some recent developments help point to many of the reasons why the stock remains attractive for long-term growth-oriented investors.
Cognex upgrades expectations
Cognex's machine vision solutions replace the human eye in automating manufacturing and distribution processes. Examples include fitting screens on mobile phones or logistics in e-commerce warehousing. There are two reasons to feel more positive about Cognex stock, and they both speak to the long-term case for the stock. The first is management's recent upgrade to revenue expectations for its third quarter. Back in the second-quarter earnings report management gave disappointing guidance of revenue of $160 million to $180 million for the third quarter. Management put that down to "the June fire at the company's primary contract manufacturing site and lower expected revenue from e-commerce logistics."
Fast forward to the recent update, and management upgraded guidance to revenue of $195 million to $205 million. Management put the guidance increase down to its ability to deliver on customer orders "sooner than anticipated due to strong progress in replenishing component inventory destroyed in the previously disclosed fire."
Why it's good news
It highlights that the company's component shortage problems are likely to ease and speaks to its commitment to its customers. The latter is a crucial factor in a growth company's development. As a growth company trying to encourage the adoption of its machine vision technology in new markets (more on that in a moment), it makes sense to establish relationships with industry leaders, and it also makes sense to service those customers well.
There's evidence Cognex is doing both of those things. For example, its most significant consumer electronics customer is Apple, while its largest logistics customer (although undisclosed) is possibly Amazon. Establishing relationships with such companies will surely encourage the adoption of its technology among second- and third-tier players.
Furthermore, Cognex has long been proactive in servicing key customers. In 2014, management significantly increased expenses to service its large orders with Apple. That business approach was echoed in 2021. When component shortages started to bite, management prioritized delivery of chips. According to CEO Rob Willet on the fourth quarter conference call, prioritizing delivery to customers "added incremental costs in 2021, due to the significant premiums we've paid to procure components through brokers, and for expedited freight".
Upgrade to served market estimate
Second, Cognex recently upgraded its estimate for its served market to $6.2 billion from a previous estimate (given in 2019) of $4.2 billion. The new estimate breaks out its market in terms of its three key end markets, with logistics (essentially machine vision for use in e-commerce warehousing) now being its largest end market at $2 billion, automotive (Cognex's traditional end market) representing $1.5 billion, and consumer electronics adding $1.35 billion. The medical-related end market is $650 million, and "others" makes up $1 billion.
Interestingly, logistics is now, by far, Cognex's largest served market -- a significant improvement from being a distant third a few years ago. Similarly, the "others" end market is almost as large as Cognex's consumer electronics market -- suggesting there's plenty of growth potential from the adoption of machine vision in new markets.
Management estimates its current market share is only around 15%, giving it ample room to grow by taking market share and participating in end market growth of 13% over the long term. Overall, management expects to grow at a 15% rate over the long term.
Data by YCharts
What it all means to investors
While there's no guarantee that Cognex will grow at 15% over the long term -- a figure in line with the mid-teens annual revenue growth achieved over the last decade -- , the upgrade to third-quarter estimates demonstrates how lumpy the company's earnings growth can be. All it will take is automotive companies expanding electric vehicle (EV) manufacturing lines, e-commerce warehousing companies developing facilities, or consumer electronics companies introducing new product lines, and Cognex could see a few large orders. These are some factors in the thinking behind the estimate of long-term growth of 15%. Cognex now trades on a multi-year valuation low (see chart above), and despite the bad news this year, it remains an attractive growth stock option.
