Building Eyes for Robots Is a Winning Strategy

In the 1970s, scientists became fixated on creating machines that could "see"...

Computer scientists began flocking to the Massachusetts Institute of Technology ("MIT") to study the burgeoning field of artificial intelligence ("AI"). The early AI models had a simple goal...

They wanted intelligent machines to mimic the way humans think, feel, move, and make decisions. They thought it would be easy to replicate human visual perception in machines. But in practice, building a robot that could "see" proved challenging...

The initial "machine vision" project landed in the lap of part-time undergraduate researcher Gerald Sussman. His professors – the founders of the MIT AI project – tasked him with solving the concepts needed for a computer to interpret images.

After years of study and failures, this group finally met its goal. And today's company was born out of this flock of researchers...

Cognex (Nasdaq: CGNX) provides "machine vision" to industrial manufacturers that have automated factories all over the world. Put simply, the company sells cameras and barcode readers that perform quality control checks.

In 1982, less than a year after its start, Cognex launched the world's first character-recognition system, called DataMan.

The prototype – a camera mounted along the assembly line and software that recognized letters – sold to a typewriter manufacturer that used it to identify flaws in the quality of letters, numbers, and symbols. This "smart camera" also did quality checks, ensuring the correct positioning of keys during production.

Today, 40 years later, some of the largest companies in the world still use improved versions of this same technology. Cognex machine vision performs quality inspections along the assembly line in just about every industry...

For example, AstraZeneca (AZN) – one of the world's leading pharmaceutical companies – uses Cognex Checker to identify errors on drug labels, which could mean the difference between a safe dose and one that kills you.

In the automotive industry, Cognex cameras can see three-dimensionally, which is vital for identifying imperfections in parts coming off the assembly line.

According to Cognex's founder, nearly every smartphone manufacturer uses the company's machine vision as quality control to inspect components or to track parts. That includes Apple (AAPL), the largest smartphone company in the U.S. and one of the top smartphone makers in the world.

It's easy to see why these companies are turning to Cognex...

For 40 years, Cognex has focused exclusively on machine vision. Nothing else. It has a long legacy in the development of machine vision, and it protects its technology with patents. That's how it beats out the competition. And there are a lot of patents giving Cognex an edge...

Between those that have already been issued and ones that are pending, Cognex has more than 1,000 patents worldwide. That means it's easier to rely on Cognex's expertise and partner with it rather than trying to compete on machine vision.

By most financial metrics, the business is incredibly strong...

Cognex has a $8.7 billion market cap, $314 million in cash, and just $34 million in debt. That's almost no debt for a company its size.

It earned more than $1 billion in revenue in 2021 – up 28% from the previous year. And in the first quarter of 2022, Cognex saw revenue surge another 18%.

The company has thick 72% gross profit margins. That means it keeps nearly three-quarters of every dollar in sales after covering the cost of goods sold. By comparison, the average gross margins of companies in the S&P 500 Index are less than half that, at just 33%.

Cognex's highly lucrative earnings margins helped generate $300 million in free cash flow ("FCF") last year. (FCF is what's left after the company pays for all operating costs, including capital expenditures.) Its FCF margin (FCF divided by sales) is more than double the S&P 500's 12%, coming in at 30%.

Cognex uses its FCF to reward shareholders. Shares pay a small dividend yield. But historically, the company dumps millions into its share buyback program. As the company reduces the number of outstanding shares, each share becomes increasingly more valuable.

Cognex has built a highly specific business in machine vision. As one of the first companies to specialize in this field, it has intellectual property rights that safeguard the business from its competition. This should continue to drive strong sales and FCF growth, pushing shares higher.

Sometimes investing is simple.