Cognex (CGNX)

Machine vision technology company Cognex (NASDAQ:CGNX) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 18% year on year to $276.9 million. The company expects next quarter’s revenue to be around $237.5 million, close to analysts’ estimates. Its non-GAAP profit of $0.33 per share was 13.5% above analysts’ consensus estimates.

Company Overview

Founded in 1981 when computer vision was in its infancy, Cognex (NASDAQ:CGNX) develops machine vision systems and software that help manufacturers and logistics companies automate quality inspection and tracking of products.

Companies in this sector, especially if they invest wisely, could see demand tailwinds as the world moves towards more IoT (Internet of Things), automation, and analytics. Enterprises across most industries will balk at taking these journeys solo and will enlist companies with expertise and scale in these areas. However, headwinds could include rising competition from larger technology firms, as digitization lowers barriers to entry in the space. Additionally, companies in the space will likely face evolving regulatory scrutiny over data privacy, particularly for surveillance and security technologies. This could make companies have to continually pivot and invest.

Cognex competes with other machine vision and automation technology providers including Keyence (TYO:6861), Omron (TYO:6645), and Teledyne Technologies (NYSE:TDY), as well as divisions of larger industrial automation companies like Rockwell Automation (NYSE:ROK).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $971.7 million in revenue over the past 12 months, Cognex is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.

As you can see below, Cognex’s sales grew at a decent 5.1% compounded annual growth rate over the last five years. This shows its offerings generated slightly more demand than the average business services company, a useful starting point for our analysis.

Long-term growth is the most important, but within business services, a half-decade historical view may miss new innovations or demand cycles. Cognex’s annualized revenue growth of 5.1% over the last two years aligns with its five-year trend, suggesting its demand was stable.

This quarter, Cognex reported year-on-year revenue growth of 18%, and its $276.9 million of revenue exceeded Wall Street’s estimates by 5.2%. Company management is currently guiding for a 3.4% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 6.8% over the next 12 months, an improvement versus the last two years. This projection is above the sector average and indicates its newer products and services will fuel better top-line performance.

Cognex has been a well-oiled machine over the last five years. It demonstrated elite profitability for a business services business, boasting an average operating margin of 20.9%.

Looking at the trend in its profitability, Cognex’s operating margin decreased by 15 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Cognex generated an operating margin profit margin of 20.9%, up 7.4 percentage points year on year. This increase was a welcome development and shows it was more efficient.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Cognex’s EPS grew at a weak 1.6% compounded annual growth rate over the last five years, lower than its 5.1% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

Diving into the nuances of Cognex’s earnings can give us a better understanding of its performance. As we mentioned earlier, Cognex’s operating margin expanded this quarter but declined by 15 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Cognex, its two-year annual EPS growth of 3.4% was higher than its five-year trend. Accelerating earnings growth is almost always an encouraging data point.

In Q3, Cognex reported adjusted EPS of $0.33, up from $0.20 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Cognex’s full-year EPS of $0.94 to grow 15.2%.

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.

Cognex has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging 20.8% over the last five years.

Taking a step back, we can see that Cognex’s margin dropped by 10.2 percentage points during that time. 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 clocked in at $86.03 million in Q3, equivalent to a 31.1% margin. This result was good as its margin was 9 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends trump fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Cognex historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 14.6%, somewhat low compared to the best business services companies that consistently pump out 25%+.

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.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Cognex is a profitable, well-capitalized company with $300.3 million of cash and $10.61 million of debt on its balance sheet. This $289.7 million net cash position is 3.6% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Cognex blew past analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its full-year EPS guidance missed and its revenue guidance for next quarter was in line with Wall Street’s estimates. Overall, this print was mixed. The stock remained flat at $47.01 immediately after reporting.

Updated: December 4, 2025 at 11:01 PM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

We see the value of companies helping their customers, but in the case of Cognex, we’re out. Although its revenue growth was decent over the last five years and Wall Street believes it will continue to grow, its diminishing returns show management's prior bets haven't worked out. And while the company’s powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits, the downside is its declining adjusted operating margin shows the business has become less efficient.

Cognex’s P/E ratio based on the next 12 months is 35.3x. At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $48.40 on the company (compared to the current share price of $38.77).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.