Cognex Stock: Machine Vision Play Is Compelling After 50% Drop

Cognex Corporation Operates in Potential $75-Billion Market

It’s estimated that the machine vision market will grow worldwide to $74.9 billion by 2027. (Source: “Machine Vision System Market Outlook – 2027,” Allied Market Research, last accessed July 14, 2022.)

Machine vision systems integrate hardware and software to acquire images, analyze them, and deliver information to control machines or processes. The idea is that, by using precision machine vision technology in manufacturing processes, companies can turn out better products.

A leading machine vision developer with strong upside potential is Cognex Corporation (NASDAQ:CGNX). The company provides vision systems, software, sensors, and industrial barcode readers that are used in manufacturing automation. (Source: ”Investor Relations,” Cognex Corporation, last accessed July 14, 2022.)

Cognex Corporation has been generating high revenues, profitability, and free cash flow. Yet, CGNX stock is down by 50% from its November 2021 high and down by 42% this year. This, in my view, presents a nice risk/reward opportunity.

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The below chart shows a bearish falling knife pattern, which tends to be difficult and long to recover from.

Cognex stock is showing some support, however. With its rise in relative strength and its uptrending moving average convergence/divergence (MACD), CGNX stock could mount a rally toward $60.00–$70.00 prior to selling off.

Chart courtesy of StockCharts.com

CGNX Stock Has Strong Fundamentals

Cognex Corporation’s five-year revenue picture shows some inconsistencies, but the company grew its revenues in the last two reported years, including during the COVID-19 outbreak in 2020.

In 2021, the company’s revenues surged by 27.9% to above $1.0 billion for the first time.

Its revenue is expected to grow by 8.9% to $1.1 billion this year and by 10.0% to $1.2 billion in 2023. (Source: “Cognex Corporation (CGNX)” Yahoo! Finance, last accessed July 14, 2022.)

While Cognex stock has pulled back, the company’s forward multiple remains at six times its consensus 2023 revenue estimate. It’s not cheap, but it’s much better than the 10+ multiple it had at its high.

Fiscal YearRevenuesGrowth
2017$766.1 MillionN/A
2018$806.3 Million5.3%
2019$725.6 Million-10.0%
2020$811.0 Million11.8%
2021$1.0 Billion27.9%

(Source: “Cognex Corp.” MarketWatch, last accessed July 14, 2022.)

Cognex Corporation has produced five consecutive years of earnings before interest taxes, depreciation, and amortization (EBITDA) income, including double-digit growth in 2020 and 2021.

Fiscal YearEBITDA (Millions)Growth
2017$275.8N/A
2018$242.7-12.0%
2019$167.5-31.0%
2020$232.538.8%
2021$335.444.2%

(Source: Ibid.)

Cognex Corporation has also consistently delivered generally accepted accounting principles (GAAP) diluted earnings-per-share (EPS) profits, including a five-year high of $1.56 in 2021.

The company’s consensus EPS estimates have been rising. Look for Cognex to report $1.71 per diluted share for this year and $2.03 per diluted share for 2023. (Source: Yahoo! Finance, op. cit.)

This implies that Cognex Corporation is trading at a reasonable 21.5 times its consensus 2023 EPS estimate.

Fiscal YearGAAP Diluted EPSGrowth
2017$0.90N/A
2018$1.2425.6%
2019$1.16-5.9%
2020$1.0014.2%
2021$1.5655.9%

(Source: Ibid.)

If that wasn’t enough, Cognex Corporation has churned out positive free cash flow in each of the last five years, including a 30.3% jump to a record $298.6 million in 2021.

Fiscal YearFree Cash Flow (Millions)Growth
2017$195.6N/A
2018$186.4-4.7%
2019$231.524.2%
2020$229.1-1.0%
2021$298.630.3%

(Source: Ibid.)

Furthermore, Cognex Corporation’s balance sheet has a high amount of working capital, minimal debt of $34.5 million, and a solid cash position of $314.7 million. (Source: Yahoo! Finance, op. cit.)

Analyst Take

Institutional investors love Cognex stock, with 776 institutions holding a 94.9% stake in the company’s outstanding shares. (Source: Yahoo! Finance, op. cit.)

I view the current price weakness in technology stocks as temporary, and feel that the sell-off of Cognex Corporation’s shares provides a nice entry point for contrarian investors.