I'm not going to sugarcoat this: Machine vision company Cognex (CGNX 0.27%) is heading for a tough year, and there's a substantial risk that management won't have great news for investors when it delivers its first-quarter earnings on April 30. On the other hand, the stock looks like an excellent value for long-term investors searching for a growth stock to buy and hold for decades to come. Here's why.

Cognex, automation, and AI

The company makes machine vision and barcode reading technology. In a sense, it's the eyes and, increasingly, the brain of automated equipment. As manufacturing and logistics companies continue to invest in automated production lines and logistics, the demand for machine vision will increase.

In addition, it's not only generating productivity by replacing labor in terms of inspecting, identifying, monitoring, and precisely guiding production lines and logistics, but the reality is that its machine vision solutions can do the job better than humans. Moreover, that ability is increasingly enhanced by embedding artificial intelligence (AI) learning tools that make its machine vision systems easier to set up and able to perform more complex tasks.

For an example of its technology, consider a smartphone manufacturer like Apple (previously cited as a significant customer) when it needs to monitor quality control or guide automated processes precisely. Similarly, there's electric-vehicle (EV) battery-making, another key market for Cognex, for which the precise management of automated processes is critical to production lines, and e-commerce fulfillment centers, where automation is essential.

Image source: Getty Images.

Challenging end markets

I've mentioned the three key Cognex end markets: consumer electronics, automotive, and logistics. (The company also sells to various medical and factory automation customers.) Overall, management sees its end markets growing at 13% a year, with the company's growth outpacing the industry's 15% growth.

The company has previously achieved and bettered that rate, but the past few years have been challenging, to say the least.

CGNX Revenue (TTM) data by YCharts

In a nutshell, all three of its key end markets faced significant challenges. First, in logistics, demand boomed following the lockdowns as many companies accelerated their e-commerce investment plans, only to suffer a sharp retraction in recent years because of a natural correction from previous hypergrowth.

Second, relatively high interest rates have curtailed automotive sales, and there's been a sharp slowdown in EV-related spending, partly because automakers accelerated their EV plans during the pandemic. Third, high interest rates also pressure consumer discretionary spending on consumer electronics, and smartphone designers have held back on launching new models and making capital investments in production lines.

Throw in the current uncertainty around the tariff conflict, and it's possible Cognex will disappoint with its trading update on April 30. That's a key date in the year, because Cognex tends to win major orders in the spring as customers prepare to gear up for production in the fourth quarter.

Indeed, Wall Street analysts have lowered their earnings expectations for the company over the past couple of months.

Image source: Getty Images.

Why Cognex stock is a buy

While the setup going into the results isn't great, Cognex is still highly attractive. Its end markets won't be in limbo forever, and machine vision is one of the answers to the question of how the U.S. and other higher-cost labor countries can reindustrialize and bring manufacturing back from low-cost-labor countries. The following chart demonstrates that its valuation on a trailing-12-month basis is favorable historically when comparing free cash flow; earnings before interest, taxation, depreciation, and amortization (EBITDA) to enterprise value (market cap plus net debt); or price to sales.

CGNX Price to Free Cash Flow data by YCharts

Moreover, consider that, if Wall Street is right, these valuations are based on trough earnings and cash flow as the company is likely to bounce off the bottom in 2025, and its long-term growth rate makes it look like an excellent growth stock at a reasonable price.

Cautious investors may want to wait for the earnings report and perhaps get a better entry point. Still, if you can stomach potential volatility, Cognex is an excellent stock for long-term investors.