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Is Teradyne Becoming an Industrial Robotics Stock?

With many new disruptive technologies, you will find few pure-play stocks out there for retail investors to take part in. That’s certainly not the case with robotics however, and we’ve written quite a few articles on investing in robots, from buying robot ETFs to buying Japanese robot stocks. Still, we’re always on the lookout for new opportunities to invest in robotics, and this week one company came across our radar that merits a closer look.

We first came across Teradyne in our article on how to Automate Nearly Anything with Universal Robots. That’s because in 2015, Universal Robots was bought by Teradyne, Inc. (NYSE:TER), a $6.6 billion company which has historically been involved in automatic test equipment for electronics. That may slowly be changing, as just a few days ago Teradyne acquired another startup based out of Odense Denmark called MiR. While that acquisition made the news, Teradyne also made another robotics acquisition in February which was barely even mentioned in the media. Before we talk about these two acquisitions and what they mean for Teradyne, let’s talk about what it is that the company does today.

With a market cap of just under $6.5 billion, Teradyne is primarily “a developer and supplier of automatic test equipment (ATE)”, a business that is subjected to the sort of volatility that is inherent to the semiconductor industry. Just days ago, Teradyne released their Q1-2018 earnings report which caused their share price to plummet, falling to around $33 a share. That’s a -34% drop since their stock hit an all-time high of just over $50 a share in March. In order to understand why, we need to look at where Teradyne makes their money today. Here is the revenue breakdown across all four of their divisions from last quarter:

Source: Teradyne

Those numbers are taken from Teradyne’s Q1-2018 earnings release which was published on April 24th, causing their share price to plummet on the same day. That’s because 76% of their revenues come from semiconductor test equipment, and a large component of that is testing mobile devices. Long story short, just days ago Teradyne said in their earnings call that they “expect substantially lower demand for new test capacity this year than we anticipated in our January call”. The company goes on to say:

I should point out that this is not a result of any loss of business to competitors, and we do not believe it’s a long-term, broad-based change in the mobility market. Rather, it is an isolated reset of specific 2018 customer plans.

While this temporary setback may present a good buying opportunity, we’re more interested in learning more about the “industrial automation” division which is where all their growth is expected to come from. Right now, this division accounts for just 10% of total revenues, but that number is expected to increase sharply with the latest earnings call citing “Universal Robots sales growth of 45% to 50% a year over the next four years”.

If we take the lower end of that estimate using the above Q1-2018 numbers, revenues for Universal Robots would hit $314 million in five years. Using today’s numbers, that means industrial automation would then represent over 60% of the company’s revenues. And we haven’t even talked about this year’s industrial robot related acquisitions yet.

In our last article, we talked about the Universal Robots collaborative robots or “cobots” which are now being used for everything from operating banknote sorting machines to vacuuming out the inside of cars. Much of the growth may come from applications that haven’t even been thought of yet. Cobots are a relatively new concept, and the applications to “automate everything” seem limitless. What makes these cobots work so well is the software that’s used to operate them, and that’s why in February of this year, Teradyne quietly acquired a company that builds cobot software.

Founded in 2001, Massachusetts startup Energrid had taken in just $500,000 in disclosed funding to develop their flagship software platform, Actin, which allows any robot arm manufacturer to supplement their robotic hardware with an easy-to-configure real-time software solution so they can do things like vacuum carpets or count money without stepping on the human’s toes. The company collaborates with universities like Harvard and MIT, and commercial partners like Boeing and Microsoft, to develop their software which is now used by large industrial customers like Sony, Mitsubishi, and General Electric. Now, Teradyne owns the company after purchasing them in February for around $25 million according to The Robot Report. Here’s a look at what Actin can do:

Source: Universal Robots

With this acquisition, Teradyne may be looking to defend against competitors like Rethink Robotics, a cobot startup we covered a few years back, which also sells a cobot software solution called Intera. Another way that Teradyne is able to compete more effectively with Rethink Robotics is through their second robotics acquisition this year when they returned to Odense Denmark and bought a company called Mobile Industrial Robots or MiR for a total consideration of around $148 million plus a possible $124 million more in milestone payments.

Founded in 2013, Danish startup MiR had taken in around $1.6 million in disclosed funding before being acquired. That money was used to build “collaborative mobile robots” that can be used to move stuff around. If your job involves using a pallet jack to move pallets around a warehouse, you may need to start looking for a job soon. The MiR robots come in a variety of flavors, and are being used by major customers worldwide and distributed through a network of more than 130 distributors:

Source: Teradyne

It’s easy to see the synergies here. Teradyne can sell their cobot arms through these distribution channels and vice versa. Each of these solutions are easy to deploy and offer a quick return on investment. That’s great, because when we finally see a recession, these sorts of cost saving solutions will sell even faster making this an appealing value proposition regardless of the direction the market decides to take. As for revenues that MiR is expected to bring in this year, Teradyne made the following statement:

MiR is the leader in industrial collaborative robots. Last year’s sales of $12 million were about triple the prior year, and we expect 2018 sales to more than double again.

That’s the type of growth we want to see in order for Teradyne to become a pure-play on the industrial robotics theme, but the story doesn’t end there. Check out this table that was buried in their latest earnings call deck:

Source: Teradyne

This may look complicated but it’s really simple. Earlier we talked about how MiR was acquired for “$148 million plus $124 million in possible milestone payments”. The above table shows the sales targets that MiR needs to hit in order to get their $124 million in milestone payments. In 2018, we already know that sales are expected to double to $24 million. If MiR hits the “full earn-out” targets in the above table, that would mean revenues would roughly double for three years running. By 2020, MiR would have quarterly revenues of around $24 million, about half of what the entire division’s revenues are today. Then there’s the prospect of future acquisitions. With $1.5 billion in cash and marketable securities as of their last filing, Teradyne’s more than able to aquire even more industrial robotics startups.

In a past article, we looked at three U.S. stocks that investors might consider for exposure to industrial robotics, however none of these large companies represented a pure-play on the theme. Teradyne might just be the pure-play we’re looking for if their growth plans come to fruition. If we take a look at the world’s most popular robotics ETF, ROBO, we see that Teradyne occupies a weighting of less than 1%. We may look to dollar-cost-average into some shares of Teradyne for some exposure to the industrial robotics growth story. In a coming article, we’re going to look at some industrial robotics startups Teradyne might look to buy – like Rethink Robotics – so stay tuned.

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