The management team at Cognex (CGNX +2.44%) believes the machine vision specialist can grow its revenue at a 15% annualized rate over the long term. Unfortunately, that's not the growth rate the company will hit this year or even in 2023, according to Wall Street. The analysts' consensus forecast is that revenue will be more or less flat at around $1 billion from 2021 to 2023.
That said, no one buys a growth stock expecting it to deliver strictly linear growth, and buying when the market is fearful is often a good idea for long-term investors. Here's why I think that's the case for Cognex.
Cognex's long-term growth opportunity
Despite its near-term problems (more on those in a moment), Cognex still has enormous long-term growth potential.
The company's machine vision technology has three key end markets: its traditional core automotive market, consumer electronics (Apple is a significant customer), and its fast-growing logistics business (mainly servicing e-commerce warehousing, where Amazon.com is believed to be a substantial customer).
NASDAQ: CGNX
Key Data Points
The automotive industry has long been an early adopter of automation technology, and Cognex's machine vision helps it eliminate production defects and track components in the production plant. It's a similar story in consumer electronics where, for example, machine vision helps Apple layer screens precisely on smartphones. In logistics, Cognex's machine vision and barcode-reading technology help ensure e-commerce fulfillment centers work optimally.
Outside of these three key end markets, Cognex sells into the medical space, plus a myriad of other markets lumped together as "others." Management's estimates for its served markets and market shares are shown below. Incidentally, its estimated served market is up 55% from its last estimated figure of $4.2 billion in 2019.
| End Markets |
Cognex's Served Market |
Cognex Market Share |
Estimated Long-Term Market Growth |
|---|---|---|---|
|
Automotive |
$1.5 billion |
15% |
10% |
|
Electronics |
$1.35 billion |
20% |
15% |
|
Logistics |
$2 billion |
15% |
20% |
|
Medical |
$650 million |
>10% |
10% |
|
Others |
$1 billion |
<20% |
10% |
|
Total |
$6.5 billion |
15% |
13% |
Data source: Cognex presentations.
What went wrong in 2022?
The long-term growth picture looks good. And with solid and long-established positions with the leading car manufacturers (including in electric vehicle production), Apple in consumer electronics, and probably Amazon in logistics, Cognex has an opportunity to establish its technology with leading industry players. In addition, those relationships will help Cognex sell to lower-tier customers in the future.
That said, the company is going through a challenging period right now.
Investors started the year hoping that the global supply chain crisis would ease leading to upticks in automotive and consumer electronics production alongside ongoing strength in the logistics market in line with surging e-commerce growth.
Unfortunately, almost everything that could go wrong did go wrong. First, Russia's invasion of Ukraine added a new source of trouble to the supply chain, and China's ongoing COVID-related lockdowns continued to impact that country's output negatively. (To fulfill customers' orders, Cognex paid significant premiums for components bought at spot rates from brokers.)
Second, global automotive production was curtailed by the ongoing supply chain crisis. The consumer electronics industry suffered a slowdown in growth, and worst of all, the company's logistics market contracted severely as Amazon and others dialed back their capital expenditures in response to slowing consumer spending.
Third, to cap it all, a fire at a primary contractor site in Indonesia damaged a significant amount of its component inventory -- the same inventory Cognex had fought hard to procure at high prices.
When will Cognex get back to growth?
The third-quarter earnings call made it clear that the severe contraction in logistics orders will negatively impact Cognex's revenue in 2023. Moreover, Honeywell International (owner of a warehouse automation business) has already told investors to prepare for softness in warehouse automation spending next year.
On the other hand, the slowdown in Cognex's end markets won't last forever. For example, the reduction in logistics spending is likely to be temporary as e-commerce spending trends remain in place. Moreover, consumer electronics companies are under constant pressure to innovate and introduce new products. Finally, the supply chain crisis (notably in the area of semiconductors) should ease for the automotive industry, and spending on new electric vehicle production lines should remain in place. As a result, there will be large pockets of investment in the auto industry, and Cognex stands well-positioned to benefit.
Everything points to Cognex ending 2023 in better shape than it enters it. If you are prepared to tolerate some potentially bad news in the near term, now could be a great time to get exposure to its long-term growth story.
