The Sell-Off In Kornit Digital May Set Up A 2nd Half Opportunity

Capitulation In Kornit Digital Market Could Lead To A Rebound 

Kornit (NASDAQ: KRNT) appeared to be perfectly set up for the times but the times changed too quickly and that story is played. The company manufactures, markets, and services a range of digital printing applications for the textile and packaging industry. The company’s offerings are at the cutting edge of the industry and linked through smart connections that allow complete control at the push of a button. The problem for the company now is that efforts by end-markets to mitigate inventories and a sudden delay of capital projects cut deeply into the 2nd half results stalled the company’s growth. 

“The overall re-calibration of e-commerce growth, combined with macro headwinds which meaningfully accelerated in the last few weeks of the quarter, as well as delays in the completion of customer production facilities, resulted in a significantly slower pace of direct-to-garment (DTG) systems orders in the second quarter as compared to our prior expectations,” said Ronen Samuel, Chief Executive Officer of Kornit Digital. “We have entered a period where some of our customers are working through excess capacity built throughout the two-year pandemic period, which we expect to continue for the near term.”

Kornit Is A Rebound In The Making 

The opportunity is that business is expected to rebound by early 2023 if not later this year which puts the selloff into a new perspective. In our view, the market was expecting bad news and it got it. The sell-off is a major capitulation in the market and one that could easily lead to a relief rally if not an actual rebound. Longer-term, the outlook for this company is robust due to the nature of its business. Digital printing solutions will revolutionize the industry. 

“We see meaningful post-pandemic opportunities with major brands and retailers shifting production from mass-analog off-shore production to short-run, near-shore production, and believe Kornit is well-positioned to take advantage of these trends.” Mr. Samuel added. 

The analysts continue to reel in their targets but the long-term view of the community is still bullish. The 6 analysts with current ratings have it pegged at a Moderate Buy despite the two new downgrades from Buy to Neutral. The real takeaway, however, is the price target which was also trimmed. The salient point here is the new low price target of $26 expects about 20% of upside from these new low share prices while the consensus target is pushing triple-digit gains. 

"We maintain our Buy rating as we believe the bad news is now announced and digital fabric printing remains in (the) infancy stage of adoption," analyst Jim Suva of Citigroup wrote in a note to clients while cutting the firm's price target to $50.

The Institutions See Potential In Kornit 

The institutions see potential in Kornit as well. The institutions purchased a number of shares worth roughly 30% of the now market cap over the past year and hold more than 90% of the stock. That figure may grow now the stock is trading at such a deep discount but that remains to be seen. As it is, the stock is trading at the lowest levels since the pandemic started and it may move lower. A break below the $22 level would be bearish and could lead to another 50% decline or greater. If, however, the market is able to establish support at or near the current level we see the stock trending sideways until there is positive business development.