Cognex has been on fire lately. In the past six months alone, the company’s stock price has rocketed 46.7%, reaching $46.30 per share. This run-up might have investors contemplating their next move.
Is there a buying opportunity in Cognex, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Cognex Not Exciting?
We’re glad investors have benefited from the price increase, but we're swiping left on Cognex for now. Here are three reasons there are better opportunities than CGNX and a stock we'd rather own.
1. Lackluster Revenue Growth
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 annualized revenue growth of 2% over the last two years was below its five-year trend. 
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Cognex’s margin dropped by 15.8 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 19.3%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Cognex’s business quality ultimately falls short of our standards. Following the recent surge, the stock trades at 47.6× forward P/E (or $46.30 per share). This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at one of our top software and edge computing picks.
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