Teradyne Stock: Where’s the Robotics Exposure?

Common readers have in all probability been following our current quest to seek out one of the best semiconductor inventory. We’ve dropped down fairly the rabbit gap making an attempt to determine an organization within the mildew of Nvidia (NVDA). Its graphic processing units (GPUs) have helped it take a dominating place in a number of industries and sectors associated to computing, together with AI chips, information facilities, gaming and the metaverse, and (a minimum of at one level) crypto mining. However not each funding play needs to be a pure play. Typically the best choice is to go together with the pick-and-shovel play. Or each.

We initially went lengthy on Teradyne (TER), which automates testing for semiconductors and an array of different digital and digital gizmos, as a result of it was going lengthy on industrial automation by buying 4 robotics corporations within the span of 4 years. Our thesis was that Teradyne would ultimately provide important publicity to the robotics theme. Sadly, it’s not occurring as shortly as we’d like. Whereas we proceed to attend, we’ve been distracted by the truth that the Baawston-area firm can be a pick-and-shovel play on AI and automation. It’s a main service supplier to big-name prospects like Samsung, Qualcomm, and Intel that energy issues like supercomputers, sensible home equipment, and smartphones. Like Nvidia, it provides each direct and oblique publicity to a number of rising applied sciences.

It’s been a little bit greater than a 12 months since we final checked in with Teradyne, in an article we optimistically referred to as Teradyne Inventory: The Forecast Seems to be Higher Than Ever. On the time, the corporate had simply posted file earnings, however the inventory had taken it on the chin as a result of administration truly supplied some fairly clear steering for the primary half of 2022 that advised income headwinds have been blowing. Whereas we don’t have the 2022 full-year SEC report but, Teradyne held an official presentation on the finish of final month. Let’s see the place issues stand with Teradyne inventory in 2023.

The Chips are Down and Buyer Focus is Up

And let’s begin with the dangerous information. Annual income dropped about 15%, from $3.7 billion to $3.2 billion, in 2022. The cash drain was primarily within the system-on-chip (SoC) testing market, which the corporate estimated dropped 6% globally to about $4.6 billion. Primarily based on that estimate, Teradyne accounted for about 37% of the market share with $1.7 billion in income. Backside line is that testing income – Semiconductor Check (consists of SoC testing and reminiscence), System Check (one thing to do with information storage and protection techniques), and Wi-fi Check (connectivity and all that) – was fairly lackluster.  

The corporate warned buyers of extra the identical in 2023. For instance, it predicted the marketplace for SoC checks would contract between 10% and 30% under final 12 months’s $4.6 billion degree, so count on one other drop in SoC testing income. Administration did attempt to put a optimistic spin on issues, after all. The mass manufacturing of 3-nanometer chips is meant to select up steam this 12 months, so that would assist offset softness in different components of the corporate’s testing markets. Particularly, Teradyne stated its “traditionally largest finish buyer” is predicted to steer this transition. That’s both Samsung or (extra seemingly) Taiwan Semiconductor. Whereas the latter is the world’s largest semiconductor producer, the previous bought a bounce begin on producing the first-generation of 3-nm chips final 12 months.  Regardless, that buyer will transfer from lower than 10% of 2022 income to a low double-digit proportion of income for this 12 months.

Buyer focus is an ongoing downside for Teradyne. In 2021, the corporate’s 5 largest prospects accounted for 33% of its complete income. Taiwan Semiconductor alone represented virtually 19% of its 2021 consolidated revenues and was as excessive as 25% in 2020. Final 12 months, Qualcomm was the one firm to account for a minimum of 10% of complete revenues, in line with administration, although we don’t know the complete image till the 10K hits the newsstands. Regardless, Teradyne is reliant on a distressingly small variety of prospects.

 The Roundup on Robots

Now, on to industrial automation (IA), also referred to as the robotics stuff, the explanation why we invested in Teradyne within the first place. Income was up simply 7%, from $376 million in 2021 to $404 million in 2022. That’s an enormous letdown after Teradyne’s income from its robotics division jumped 34% between 2020 and 2021. Blame a robust U.S. greenback for dragging down income, in line with the corporate’s bigwigs, who stated income development was truly 15% in fixed {dollars}. That is smart, as a result of 65% of 2022 gross sales have been outdoors of the US, together with 40% in Europe, 11% in China, and the opposite 14% unfold throughout the remainder of the globe.

The most important piece of the pie comes from Common Robots, which Teradyne acquired in 2015 for $285 million. Final 12 months, the subsidiary contributed $326 million. The robotics firm additionally launched its strongest cobot thus far, the UR20, which may transfer payloads as much as 45 kilos, regardless of solely weighing about 140 kilos. Mobile Industrial Robots (MiR), which Teradyne added to the fold for $148 million in 2018, accounted for $77 million – a 19% improve in income from the 12 months earlier than.

Like its testing markets, Teradyne expects the IA division to face an uphill battle within the first half of this 12 months earlier than rolling to victory within the second half. Why the optimism? Effectively, the corporate doesn’t imagine foreign money alternate can be such an issue in 2023. As well as, Teradyne is constructing its buyer base outdoors of conventional distributors and into manufacturing, which grew 26% in 2022, amongst different verticals. Lastly, the corporate believes the brand new UR20 will drive gross sales, resulting in greater than 20% development in 2023 income, largely loaded on the again finish. (Extra on this in a bit.)

The Bull Case for Teradyne Inventory

One factor we like about Teradyne inventory is that the corporate offers numerous information and evaluation, and administration clearly explains what’s up with what. Right here we see the corporate has revised its mid-term outlook by 2026 primarily based on the present market weak spot.

Primarily based on the near-term situations, the 2026 numbers appear fairly optimistic. Administration is bullish for just a few causes. It believes markets like AI and cloud computing, cell processing and automotive – particularly superior driver-assistance system ADAS and electrical autos – are driving up the numbers and complexity required of semiconductor {hardware}. Ditto for markets serving wi-fi requirements for supporting “ever greater information volumes and the pervasive deployment of edge AI.” Teradyne has automated take a look at gear for all of those applied sciences. We’d additionally add that Teradyne seemingly stands to profit from the passage of final 12 months’s so-called CHIPS Act, which is pouring $280 billion into all kinds of rising applied sciences, together with $52 billion in subsidies and extra tax credit to corporations that manufacture chips in the US, over the subsequent 5 years. The EU additionally handed comparable laws final 12 months.

Teradyne management additionally stated IA would assist drive income development within the subsequent few years. The considering is that the entire international slackers labor shortages and wage pressures will spur extra corporations to automate. In addition they claimed that market penetration for collaborative robots, together with the little cell autonomous ones that scoot round manufacturing facility and warehouse flooring, is lower than 5%. The large announcement was that the corporate believes income from robotics will hit $1 billion, representing about 20% of complete revenues by 2026. The brand new CEO, Greg Smith, was most just lately president of the IA group, so presumably he is aware of what he’s speaking about. To hit this goal, the Industrial Automation section would want to develop by a 25% compound annual growth rate (CAGR) over the subsequent 4 years (mirrored under in inexperienced).

After ready 4 extra years, offered the corporate hits that aggressive goal, we’d solely have 20% publicity to industrial robotics which is why we’re holding the inventory within the first place. Our final piece on Teradyne talked in regards to the firm promising us that by 2024, industrial robotics can be 18% of the combo (an implied $887 million in revenues). Now we’re being spun a a lot much less enticing story. It’s terrible tempting to discover a higher technique to play the publicity of robotics and change swap out Teradyne.

The Bear Case for Teradyne Inventory

The final time we checked in with Teradyne inventory, the forecast mannequin then went out to 2024 actually seemed stronger. We hope this doesn’t grow to be a case of ceaselessly shifting the goalposts. As well as, the whole addressable marketplace for its core market in semiconductor testing is barely about $5.6 billion between SoC and reminiscence. Primarily based on the corporate’s dominant market share, we surprise if slowing income development can be a difficulty sooner or later.

Nevertheless, our largest concern is with China, and we’re not speaking about balloons. Effectively, in a manner we’re. Whereas we refuse to bask in political banter on Nanalyze, politics does have a manner of barging into the dialog with laws. Particularly, the U.S. Division of Commerce has put new restrictions on exporting semiconductor-related applied sciences to China, together with gross sales of semiconductor testers. The laws will certainly have an effect on Teradyne, although the corporate continues to be assessing the impacts and in search of workarounds resembling making use of for a bunch of licenses and waivers to proceed some operations. Nonetheless, this could possibly be particularly disruptive, given China accounts for 16% of complete income. From the Q3-2022 report: “[T]he laws might have an hostile affect on sure precise or potential prospects and on the worldwide semiconductor trade.”

So, add regulatory threat alongside buyer focus to the checklist of crimson flags we have to watch shifting ahead. 

Conclusion

These are good reminders that irrespective of how properly positioned an organization seems, it has its personal distinctive vulnerabilities. The query, as traditional, boils all the way down to threat. Whereas buyer focus for Teradyne is a priority, there is no such thing as a cause to imagine its largest prospects are going away. Actually, given the worldwide want for semiconductor know-how to energy every part from our toaster oven to our electrical automobile, long-term enterprise prospects look fairly good. The argument for accelerated industrial automation in robotics additionally is smart to us, although even when Teradyne manages to hit its $1 billion goal in three years, our publicity to industrial robotics will nonetheless be minimal. The place’s the robotics publicity we had hoped for?

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