Is Teradyne an Industrial Robot Stock Yet?
Because we write about exciting disruptive technologies, we’re read by a large number of eager first-time investors who are trying to find the next Microsoft and unaware of just how easy it is to lose money in the stock market. The fact that we’re now in the longest bull market ever doesn’t help much either. Everyone’s a great stock picker during bull markets. Since tech stocks are a volatile lot, most will plummet just as fast as they rose when the inevitable recession arrives. That’s why you should only invest with a very long horizon, and only in those companies that you’re willing to hold through times of turmoil, while perhaps increasing your position on dips with any dry powder you have lying around. “Fearful when others are greedy and greedy when others are fearful,” as the Oracle of Omaha likes to say.
We all make the same mistakes the first time we invest our own money in the stock market. Checking our positions every day, putting all our eggs in one basket, or thinking that we’re the second coming of Nostradamus when one of our stocks doubles in price, are all behaviors that first-time investors often exhibit. In today’s age of instant gratification, few have the discipline or patience to use dollar-cost-averaging and accumulate stocks while getting rich slowly over time. (The lion’s share of our dollars are in such a strategy that revolves around dividend growth investing.) Tech stocks are notoriously risky, which is why we don’t invest in many. One stock we did pick some shares up in a while back was Teradyne (TER). As of today, that position is up +110% against a Nasdaq return of +33% over the same time frame. Aside from our Nostradamus-like investing acumen, we’re curious to know why that is.
The Teradyne Thesis
A few years ago, we posed the question – Is Teradyne Becoming an Industrial Robotics Stock? There are plenty of ways to invest in the robotics theme, from ETFs to Japanese robot stocks, but Teradyne seemed interesting because they started acquiring exciting robot startups like Universal Robots with the intent to become a player in industrial robotics. With 76% of their revenues coming from semiconductor test equipment, and a large component of that involving test equipment for mobile devices, the company is looking to diversify into the high-growth segment of industrial robotics.
At the time of our article, Teradyne’s stock had fallen to around $33 a share due to “substantially lower demand for new test capacity” in 2018, with the company stating that the problem was not related to a “long-term, broad-based change in the mobility market.” Temporary setbacks present buying opportunities, and picking up some shares at that time happened to work out. So far. Today, we’re interested in the progress that’s been made in diversifying revenues so that the company isn’t overly reliant on the mobile phone industry to avoid future setbacks that may prove to be not-so-temporary. And for that, we’ll turn to the Teradyne Q4 2019 earnings call a few weeks ago which gives us some insights into what’s happening under the hood.
Teradyne in 2019
Teradyne finished out 2019 on a strong note, with full-year sales around $2.3 billion – up 9% compared to 2018 and with earnings-per-share up 21%.
In the above chart, we can see the lag in growth for 2018. As the company predicted, it was a short-term blip and growth appears to have resumed for 2019. In the latest earnings call for Q4-2019, Teradyne’s CEO makes some interesting comments about three headwinds that are helping propel their semiconductor test division which accounts for the majority of their revenues these days:
- 5G infrastructure build-out in China – this build-out has, for the moment, been mostly concentrated in China
- Significant smartphone complexity growth – increase in features like multiple cameras, enhanced photo and video processing, and new connectivity features
- Memory test share gains – memory market declined as expected by about 35% from 2018, but their sales were only down about 3%
It’s great to hear that things are going well for the semiconductor testing division, but we’re mainly interested in the progress Teradyne is making towards diversifying their business into the high-growth area of industrial automation. Throughout 2019, several more investments happened in this space.
In October of 2019, Teradyne acquired a firm called AutoGuide Mobile Robots “for $165 million; $58 million net of cash acquired plus $107 million if certain performance targets are met extending potentially through 2022.” AutoGuide has developed the Max N10 Mobile Robot Platform. It largely consists of a modular base that allows customers to create autonomous forklifts, pallet stackers, pallet movers, and tuggers that use LiDAR to move around – no tape, no RFID tags, and no mirrors. With reference clients like Nissan, Bosch, Toyota, and John Deere, AutoGuide has a proven product line that is expected to more than double their revenue in 2019 from approximately $4 million in 2018. Still, these are small numbers when you consider Teradyne did $2.3 billion in 2019. Additionally, Teradyne invested $15 million in RealWear – a company that’s building hardware for enterprise augmented reality apps.
Now that the dust has settled, we’re interested to know if industrial robotics now constitute a meaningful portion of the company’s revenues.
Teradyne’s Industrial Robot Progress
Maybe the most important skill they teach you in business school is to never do work that someone else has already done. Simply take their hard work and exploit it for your own benefit, then credit them with a few sentences – 97% of the benefit with 3% of the effort. Fortunately for us, the great minds over at ABI Research published an article at The Robot Report titled “Teradyne doubles down on mobile robots with AutoGuide,” and provided some great insights, along with these handy charts that quickly show the extent to which industrial robots are taking hold over at Teradyne.
The first chart shows some great growth for industrial automation. If those numbers where coming from a startup, investors would be stoked. In the second chart, we can see that for 2018, 12% of Teradyne’s revenues could be attributed to industrial automation. Still, they have a long way to go before industrial automation provides meaningful contributions to the bottom line. (Right now, they’re actually losing money in the industrial automation segment with the intent to grow that part of their business to $1 billion in revenues by 2021.) In their latest 10-Q, we can see the contributions that each of their four “Industrial Automation” segments made over the first nine months of 2019 (we plugged in a $6 million pro forma number for the recent acquisition):
- Universal Robots – (82.35%) – low-cost, easy-to-deploy collaborative robots (cobots) that work alongside production workers
- Mobile Industrial Robots – (13.55%) – mobile industrial robots for low and mid payload tasks
- AutoGuide Mobile Robots – (2.78%) – high-payload industrial autonomous mobile robots like forklifts and tuggers
- Energid – (1.32%) – software that simplifies the programming of robotic motions used in a wide variety of applications
A vast majority of industrial automation revenues are coming from the purchase of Universal Robots, so let’s hope these other acquisitions start to pull their own weight soon by showing some spectacular growth.
Our original investment thesis hasn’t changed, and the stock price increasing by +110% is irrelevant to the small, long-term position that we plan to hold indefinitely – unless of course, the original thesis changes. If by the end of this year we’ve entered a global recession and the stock price falls back to where we bought it, we’ll see that as an opportunity to pick up some more shares as opposed to pissing and moaning about having left money on the table.
Fear and greed, the two emotions that are the bane of successful investors. A surprising study by Fidelity once showed that the best performing retail brokerage accounts were held by people who had forgotten about them. When 80% of professional money managers can’t beat a broad market index, anyone who thinks they’re great at picking stocks needs a reality check – unless, of course, you’re a hedge fund manager with a proven track record of beating the market and the yachts and mansions to prove it.
You also need to have money to make money. Throwing a few thousand dollars into Google’s IPO might get you base 2020 Jaguar 2021 F-TYPE COUPE today, but it wouldn’t have made you financially independent. We take the occasional punt on the occasional tech stock, and check in about once a year to see what’s been going on. Teradyne is no exception. The company has a slow-growing cash cow that they’re using to fund their move into the high-growth area of industrial automation. When the recession finally hits and companies look to cut costs even more, industrial automation should be a great place to be.
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