Teradyne [TER] is an American supplier of semiconductor testing equipment whose high-profile customers include IBM [IBM], Intel [INTC] and Qualcomm [QCOM].
This stock spotlight will discuss what investors can expect from Teradyne’s Q3 earnings. It will look at how artificial intelligence (AI) is driving demand for automated test equipment and highlight the potential impact semiconductor production delays could have.
The automated testing equipment market was worth $9.6bn in 2023, according to a September 2024 report from Global Market Insights. The report forecasts the sector will grow at a CAGR of 10% between 2024 and 2032 to a valuation of $21.7bn, and names Teradyne as an industry leader.
Teradyne Teams Up with Siemens
Teradyne Robotics, a division of Teradyne, announced in September that it is partnering with Siemens [SIEGY] to showcase how integrating robotics into digital processes can improve manufacturing.
“The groundbreaking automation innovations of the future won’t come from one single company but from close cross-technology ecosystem collaborations,” said Ujjwal Kumar, Group President of Teradyne Robotics, in a press release.
At the start of the year, Teradyne teamed up with Nvidia [NVDA] to bring AI functionalities to its mobile robots and robotics arms. The implementation of AI will improve the speed and efficiency of warehouse operations, according to a March 2024 press release.
TER Stock Gains on AI and Robotics Partnerships
TER stock has gained 15.86% since the start of 2024 through October 22, while it has also rallied 37.22% in the past year.
The Teradyne share price’s most recent close of $125.36 is down 23.19% from its 52-week high of $163.21 set on July 16, a little more than a week before the Q2 results were announced.
Teradyne Near-Term Revenue Growth Under Pressure
Teradyne reported a 7% year-over-year rise in revenue to $730m for the three months to the end of June. Some $543m of this was from semiconductor testing, up 14% from Q2 2023, and $90m from its robotics segment.
“We believe the deployment of edge AI will strengthen demand in our test and robotics businesses over the mid-term,” said Teradyne CEO Greg Smith in the earnings release.
Growth in the near term, however, is expected to be under pressure. Weak demand for semiconductor automated testing equipment, especially in the automobile industry, is the result of some customers dealing with excess inventory that built up during the Covid-19 pandemic.
Teradyne has guided towards revenue of $680m–$740m for Q3, which would be up less than a single percentage point at the midway point from the $704m reported in the year-ago quarter.
Despite facing similar macroeconomic pressures, fellow automated testing equipment supplier Keysight Technologies [KEYS] saw orders for its Q3, which ended on July 31, rise marginally to $1.25bn from $1.24bn in the year-ago quarter.
Here is how Teradyne’s stock fundamentals stack up against Keysight’s and those of fellow competitor Advantest [ATEYY].
| TER | KEYS | ATEYY |
Market Cap | $20.55bn | $27.39bn | $40.37bn |
P/S Ratio | 7.59 | 5.55 | 11.56 |
Estimated Sales Growth (Current Fiscal Year) | 4.00% | -9.40% | -1.00% |
Estimated Sales Growth (Next Fiscal Year) | 22.60% | 5.60% | 0% |
Source: Yahoo Finance
While Teradyne’s projected revenue growth for the current fiscal year may be underwhelming, next year’s forecast suggests that the stock could be one to watch for the future.
TER Stock: The Investment Case
The Bull Case for Teradyne
Teradyne CEO Smith explained to analysts on the Q2 earnings call in July that cloud AI has been helping to drive demand for automated testing equipment. He also said that he’s “really optimistic” that the acceleration of cloud AI will support the adoption of next-generation 2nm chips, which, in turn, will further increase demand for its testing solutions.
In August, Cantor Fitzgerald analyst C. J. Muse upgraded Teradyne from ‘neutral’ to ‘overweight’ and included TER stock on the firm’s list of AI plays. He maintained his price target of $160, which implies an upside of 27.63% from the October 22 closing price of $125.36. There is potential for TER stock to hit $200, Muse added in a note seen by Benzinga.
The Bear Case for Teradyne
Whether TER stock can reach $200 is going to depend on the AI hype train continuing to roll down the tracks. Right now, enthusiasm remains high, but if it were to run out of steam, then it could stall semiconductor stocks.
Even if this scenario does not play out, potential future semiconductor production problems could serve as important headwinds. Taiwan Semiconductor Manufacturing Co [TSM] is on track to start making the first 2nm wafers in 2025, but any delays — like the ones that hampered 3nm production in 2022 and 2023 — would likely impact Teradyne’s revenue.
Conclusion
Teradyne is a major player in the automated testing equipment market. Its testing solutions are ideal for chipmakers looking to validate their high-end chips for AI applications. As more companies book orders for the next-generation of semiconductors, particularly 3nm wafers, Teradyne should continue to see its revenue grow.
Nevertheless, Teradyne does operate in a very cyclical industry. Any macro headwinds that could impact chip production could have a knock-on effect on growth and TER stock’s bull case.
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