Down 29%-82% from 52-week highs. Should you buy Tesla, Cognex or Plug Power stocks when they’re down?

Market volatility is rising again, with many leading stocks seeing big sell-offs. Tesla (TSLA 0.58%) AND Cognex (cngnx -0.03%) have fallen sharply in recent weeks, while Power plug (PLUG -5.29%) continues its multi-year downward trend.

Here’s what’s causing growth stocks to sell off and whether they’re worth buying when prices are falling.

From growth to value to growth again

Daniel Foelber (Tesla): Tesla has had its ups and downs in recent years. Long known as a growth stock, Tesla has historically been valued based on potential earnings and cash flow, not what it generates now. But that all changed in late 2022, when Tesla’s price-to-earnings (P/E) ratio fell below 35 and its forward P/E fell below 30.

Tesla’s stock price would double in 2023, returning the valuation to growth stock levels. Tesla looked to be back to strong operating margins and steady sales growth. However, Tesla simply hasn’t delivered the results investors expected, which is weighing on the stock.

TSLA Revenue Data (TTM) by YCharts

As you can see from the chart, revenue and profits have stagnated, and margins are noticeably lower than their peaks. The pace of electric vehicle (EV) adoption has slowed, undermining the notion that consumers will flock to affordable EVs and the world will move away from the combustion engine. Tesla has been talking less about EVs in its earnings calls and more about big ideas like robotaxis, robotics, artificial intelligence, the Optimus robot, and more.

Morgan Stanley Analyst Adam Jonas values ​​the core car business at $59 per share and the entire company at $310 per share. If you’re a Tesla bull, that’s not a big deal, as the price target implies about 50% upside to the stock. But let’s assume you’re more skeptical about Tesla’s ability to monetize its space-faring ideas. In that case, there’s significant downside risk if Tesla’s car business is worth less than a third of its current valuation.

In years past, Tesla’s valuation was based on massive EV sales. It succeeded, the stock was a long-term winner, and Tesla impacted the global auto industry. But today, the fundamental investment thesis has changed. With growth slowing and a P/E ratio of 58.5, buying Tesla stock is now a bet on its innovation. The good news is that Tesla has an incredibly solid balance sheet and can generate free cash flow to fund its ideas.

In that vein, Tesla is very different from a promising startup that might take on debt or dilute stock to fund ideas. Tesla has the resources to make leaps — but if its investment thesis is based on the results of those leaps, it will need at least one to make a big success.

If you’re looking to take a leap into the unknown with Tesla, the stock might be worth buying now. But if you prefer more certainty, looking for other opportunities is a better choice.

Short-term weakness creates buying opportunity in Cognex

Lee Samaha (Cognex): A machine vision company’s revenue comes from its customers’ capital expenditure plans. This is great when its customers’ target markets are growing and are ramping up production of smartphones, cars, electric vehicles, batteries, etc. However, it is very difficult when their target markets are weak and they are focused on cutting growth plans.

Unfortunately, this is the year of the latter, and based on management’s results and comments on the second-quarter earnings call, it’s getting worse. The only bright spots are logistics (e-commerce warehousing) and semiconductor end markets. However, its traditional internal combustion engine (ICE) car and EV battery business seem to be declining recently, rather than bottoming out. CEO Rob Willett said he continues to “moderate expectations for investment in 2024” from consumer electronics.

Still, when you buy a stock, you’re buying its value, not voting on its short-term prospects. What’s more, the stock’s deep discount creates a buying opportunity given the company’s long-term growth trajectory. There’s no doubt that automation and machine vision are the future of manufacturing, as products become increasingly complex and manufacturers seek to improve quality control and productivity by using automated processes that require machine vision.

The truth is that Cognex has always had highly volatile but rising revenue growth over the long term, and a good time to buy the stock is often when investors, like now, are pessimistic about the near future.

Plug Power’s revenues continue to grow… but that’s not the end of the story

Scott Levine (Plug-in Power)): Down more than 81% in the past year, Plug Power stock is undoubtedly on the radar of those looking to buy growth stocks cheaply. Take a step back and consider the hydrogen stock’s performance over the past three years—a period in which it has fallen more than 90%—and it might seem even riper for a buy. But while investors may be buying the stock when it’s at a lower price, that doesn’t mean they should rush out.

To its credit, Plug Power has done an impressive job of selling more of its fuel cell and hydrogen products to customers. Plug Power reported revenue of $891.3 million in 2023, up 27% year over year. But Plug Power’s lingering problem isn’t at the top of its income statement—it’s at the bottom. Despite its success in revenue growth, the company hasn’t generated similar profit growth. Likewise, it hasn’t generated consistent positive cash flow.

PLUG revenue data (annual) by YCharts.

As such, the company has consistently relied on raising capital through debt and equity issuance to stay afloat. This was recently demonstrated when the company announced it would sell about 78 million shares to raise about $200 million.

Until the company demonstrates significant (and sustained) progress toward profitability and positive cash flow, investors should look elsewhere to satisfy their thirst for hydrogen stocks or growth stocks in general.