The current negative sentiment around the technology sector isn't difficult to understand. The Nasdaq-100 index is down more than 20% since the start of 2022, and with the economy slowing, technology spending is likely to come under pressure. However, it often makes sense to pick up stocks when other investors are fearful, and stocks like machine vision company Cognex (CGNX -0.03%) and asset intelligence company Zebra Technologies (ZBRA 0.35%) look like good values now.
Cognex's best days are ahead of it
Machine vision company Cognex's stock has declined more than 31% over the past year. Its decline primarily comes down to a combination of specific weaknesses in its three largest markets: logistics (e-commerce warehouse automation), consumer electronics, and automotive.
As CEO Robert Willett put it during the first-quarter earnings call with analysts, "Lower activity with our largest logistics customers continues, and we're also seeing a broader slowdown across many of our end markets as customers are wary of committing to significant investment."
Much of the bad news is already priced into the stock, and there's much to like about Cognex over the long term. While companies like Amazon have paused expansion projects after a few years of torrid growth -- accelerated by the impact of stay-at-home measures on online shopping -- spending on e-commerce facilities should grow over the long term.
Cognex's other primary market, automotive, also has excellent long-term growth prospects, with automakers turning to Cognex to help them with their electric vehicle development plans. According to Willett, "it is EV and EV batteries and the use of more and more electronics in automotive design sensors and entertainment" that's driving machine vision deployment. In addition, the auto industry has long been at the forefront of adopting new technology (robotics, automation, digitization), which will likely continue as EV investment picks up.
Time to buy Cognex?
Cognex is an attractive stock for investors willing to tolerate the potential for near-term bad news. As you can see in the chart below, its growth trajectory has never been linear, and it often has worked out to pick up the stock in times of sales weakness.
Data by YCharts.
However, it is tough to predict what the news about the company's consumer electronics end market will be when it reports in May. Cognex receives consumer electronics orders in the second and third quarters and executes them in time for its customers' production ramp in the fourth quarter. It might make sense to wait and hear what management says about consumer electronics for this year before buying in.
Zebra Technologies has a lot of promise
Zebra Technologies competes in the automatic identification and data capture (AIDC) market. It manufactures and sells handheld devices that help customers (mainly in retail/e-commerce, transportation/logistics, and manufacturing) capture data. Key products include mobile computers, barcode scanners/imagers, and RFID readers.
These devices help companies in their automation and Internet of Things efforts by gathering the data used to generate knowledge and actionable insights.
It's an excellent market over the long term. Still, it's facing some near-term headwinds due to the slowdown in consumer spending and a correction in e-commerce warehouse facility spending. As such, management expects its full-year sales to be in a range of a 3% decline to 1% growth.
Looking at data from Honeywell shows how things are looking for Zebra Technologies and Cognex.
Honeywell's warehouse and workflow solutions (the blue bars in the chart below) are a rough proxy for conditions in Cognex's logistics business. Its productivity solutions and services (the orange bars in the chart below) are a direct comparison with Zebra's end markets.
Data source: Honeywell. Chart by author.
Time to buy Zebra Technologies?
Honeywell's management expects tough conditions to persist in 2023 , but it also expects to pass a trough in warehouse automation this year.
If that translates to growth in the AIDC market in 2024 and Zebra hits Wall Street expectations for earnings per share of $17.38 in 2023, then Zebra will be a company trading at 17.3 times earnings with excellent near- and long-term growth prospects.
