Logistics and AI Markets Growing, But Challenging Macro Limits 2H24 Cognex Growth
Key Takeaways: Cognex CGNX 0.00%↑ reported mixed 2Q24 results with revenues in-line with Management expectations and analyst estimates, as well as strong cost controls drove better than expected adjusted EBITDA. However, Management acknowledged that their view on the macro has worsened in 2H24 causing project and deployment delays, and unfortunately guided 3Q24 revenue below analyst expectations. The macro challenges impacting customer capex spend is largely related to higher rates, a slowing consumer spend, as well as growing election risks. Driven by the more cautionary outlook, shares of Cognex traded down ~20% on the 2Q24 results and outlook.
Although disappointed by Cognex’s Q3 outlook, we believe Managements upbeat tone around logistics and growing opportunity around AI markets, as well as AI applications keeps our long-term bullish thesis intact. Machine vision is a critical getaway that blends the physical world with software, and we believe the rise of AI within manufacturing and distribution environments will directly grow demand for intelligent vision systems globally. We also believe AI will drive adoption across next gen consumer electronic devices, automotive vehicles and semis, which we anticipate will lead to capacity expansion across Cognex’s key verticals in the coming years. Given the more challenging macro, we have taken down our estimates, but still see meaningful upside potential for “patient” long-term investors. In turn, we reiterate our buy rating but lower our price target to $64.41 on our modestly lower outlook.
View detailed historical results in our full financial model here.
Source: Company Filings, FactSet; Data In Millions
2Q24 Earnings Summary
Cognex reported 2Q24 revenues of $239.2M, which was down 1.3% Y/Y and in-line with Management's previous guidance range ($230 - 245M) and consensus expectations ($239.9M). Sales in the quarter were led by continued strong momentum in logistics (up double digits), as well as Semis with the company specifically calling out robust demand for new high-bandwidth memory for AI applications. However, auto, consumer electronics and packaging all declined in the quarter. Auto continues to suffer from delayed and canceled projects in EV, as well as poor demand from traditional auto. Meanwhile, Management seems upbeat about the opportunity in consumer electronics, and the expected upgrade cycle for new AI smartphone devices (Apple ~10% customer). That said, there is still uncertainty on when those projects will accelerate, and the Company now seems more excited about the 2025 opportunity. Lastly, Cognex continues to invest in a new GTM strategy, called Emerging Customer Initiative that is focused on expanding salesforce to reach underpenetrated customers. Cognex believes the simplicity of new products driven by edge learning AI will allow the Company to serve new customers. However, driven by the macro weakness, Cognex expects their initial goal of $50M in incremental revenue to be pushed out.
Non-GAAP gross margins in 2Q24 were 70.3%, which were down 380 basis points driven by the recent Moritex acquisition. Cognex showed strong cost controls in the quarter, with opex relatively flat Q/Q. This translated into adjusted EBITDA margins of 25.4%, which expanded 720 basis points Q/Q. The Company also generated strong cash flow, earning $27.8M in cash from operations and $23.3M in free cash flow in the quarter.
Looking ahead, Management's opportunistic view on the macro has dwindled and now expects macro challenges to persist into 2H24. In turn, Cognex provided revenue guidance in the range of $225 - 240M, which implies ~18% Y/Y growth at the midpoint but meaningfully missed consensus expectations of $242.9M. Non-GAAP gross margin is expected to be slightly below 70%, a sequential decrease, driven by the additional month of Moritex financials and negative mix. Lastly, Cognex is now guiding to adjusted EBITDA margin on a quarterly basis, which is expected to be in the range of 16 - 19% in 3Q24. Note Cognex does not include stock-based comp (SBC) in their EBITDA calculation.
5-Year Financial Outlook
Although we were anticipating the macro environment will remain challenging throughout 2024, and believed Cognex would see demand improve in 2H24 led by improving demand from logistic customers, as well as other verticals led by increasing AI adoption on the factory floor and distribution centers. Following 3Q24 results, we believe most of that thesis remains intact, but think certain AI markets will take longer time to ramp. In turn, we have modestly lowered our 2H24 and 2025 estimates. We now expect 2H24 revenues to be up 19% Y/Y (previous estimate 25%), which will translate into revenues growing 9.7% in 2024 to $918.8M. Looking ahead, we expect the Company to see growth accelerate to 12.0% Y/Y in 2025, and sustain at least 12.0% revenue growth through 2028, which is-line with the machine vision industry.
As volumes increase in 2025 we expect the Company to sustain ~71.0%+ gross margins through 2028. We expect Cognex to continue to invest in R&D at a similar rate, and account for mid-teen percent of total revenues annually over the next 5 years. Although taking longer than anticipated, we are upbeat about Cognex’s Emerging Customer Initiative, and expect the Company to see material leverage as sales accelerate. Given the increased Sales & Marketing spend, we expect the Company to report Non-GAAP operating margins of 15.0% in 2024, which is still below their long-term target of ~30.0%. However, we believe Cognex will see more meaningful leverage return in 2025 as these investments slow, and see non-GAAP operating margins exceed 20.0% in 2025. We expect Cognex to see additional leverage in the years to come and reach their 30.0% operating margin target in 2027. Cognex has historically reported EBITDA margins of ~30.0%, but keep in mind the company does not include stock-based comp (SBC) in their EBITDA calculation. When including SBC, adjusted EBITDA margins have been north of 35%. We include SBC in our adjusted EBITDA calculation, and expect the Company to see adjusted EBITDA grow from $207M in 2024 to over $575M by 2028. We expect strong adjusted EBITDA growth to translate into robust free cash flow, with FCF margins consistently exceeding 20%+ starting in 2025 through 2028.
Below is an overview of our 5 year outlook with a full downloadable financial model here.
Source: Industrial Tech Analyst, Data In Millions
Investment Thesis
We view Cognex as a leading provider of machine vision and key enabler of factory and warehouse automation. Machine vision is a critical getaway that blends the physical world with software, and we believe the rise of AI within manufacturing and distribution environments will directly grow demand for intelligent vision systems globally. We also believe AI will drive adoption across next gen consumer electronic devices, automotive vehicles and semis, which we anticipate will lead to capacity expansion across Cognex’s key verticals in the coming years. We are also upbeat about Cognex's Emerging Customer Initiative, which we believe will drive adoption among many companies who have yet to fully utilize automation. Driven by an AI revolution, we believe the Company is positioned to see 12%+ revenue growth over the next couple years. Coupled with industry leading gross margins (~70%) and a scalable operating model, we anticipate accelerating revenue growth will translate into 35%+ earnings growth. These all support our bullish stance, which drives our price target of $64.41 and equates to 50%+ upside.
As shown in our table below we use a 5 year DCF model to value Cognex shares. Based on our current forecast that includes an average 30x EBITDA multiple to our terminal value, we value Cognex shares at $64.16, which is lowered from $67.36 due to lower revenue and profit forecasts.
Source: Industrial Tech Analyst, Data In Millions Except Price Target
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