Cognex has gotten torched over the last six months - since December 2024, its stock price has dropped 21.6% to $30.06 per share. This might have investors contemplating their next move.
Is now the time to buy Cognex, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Cognex Will Underperform?
Even though the stock has become cheaper, we're cautious about Cognex. Here are three reasons why we avoid CGNX and a stock we'd rather own.
1. Revenue Growth Flatlining
Long-term growth is the most important, but within business services, a stretched historical view may miss new innovations or demand cycles. Cognex’s recent performance shows its demand has slowed as its revenue was flat over the last two years. 
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Cognex’s margin dropped by 12.2 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal it is in the middle of an investment cycle. Cognex’s free cash flow margin for the trailing 12 months was 17.7%.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Cognex’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Cognex falls short of our quality standards. After the recent drawdown, the stock trades at 33.5× forward P/E (or $30.06 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better investment opportunities out there. We’d recommend looking at our favorite semiconductor picks and shovels play.
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