Cognex Hits An Air Pocket And Analysts Start Caring About Multiples

 

Growth stock investing is a funny thing, and that’s probably why I don’t do a lot of it. When things are going great – robust beat-and-raises, sky’s-the-limit growth projections, and so on – analysts will bend over backwards to find creative ways to argue for a multiple that produces a price target at least 10% to 20% above the current price. But if the growth story hits a few bumps, even with no disruption to the long-term story, suddenly valuation matters again.

To be (somewhat) fair to analysts, they’re not the only ones – institutional and retail investors do the same. In any case, it’s looking like Cognex (CGNX) is going to see revenue flatten out a bit for two or three quarters, with some gross margin pressure from a major new customer and supply chain issues, and so the shares have flattened out a bit, “only” rising about 10% since my last update in March and lagging the broader industrial group and the S&P 500.

I’m still expecting high-teens growth over the next five years and longer-term growth closer to the mid-teens, as well as margin leverage, and I still view Cognex’s machine vision technology as a key enabling technology for automation. Multiples-based valuation was always tricky, but the prospective return as per discounted cash flow isn’t bad; in a sector with a lot of really expensive stocks with less exciting growth stories, Cognex looks relatively a little more interesting.

 

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Cognex Hits An Air Pocket And Analysts Start Caring About Multiples