Teradyne Stock: The Forecast Looks Better Than Ever

Publicly traded companies are not required by law to give guidance, yet many do as a way to communicate with investors. “Guidance” typically consists of forward-looking statements around what next quarter or next year’s revenues and/or earnings might look like. When a company revises guidance downwards, Wall Street analysts adjust their valuation spreadsheets and stock prices can fall in a dramatic fashion. That’s precisely what happened to Teradyne Inc. (TER) yesterday.

When assessing how a stock price behaves, we always need to consider what’s happening in the broader market. Check out this six-month stock price chart for Teradyne.

Six-month stock price chart for Teradyne.
Credit: Yahoo Finance

About ten days ago, shares of Teradyne started weakening along with the broader tech stock market. Then yesterday, they dropped around -25% giving Teradyne a 30-day return of about -34% compared to a NASDAQ return of -15% over the same time frame. Given the selloff in tech stocks, we can then attribute -19% of that drop to Teradyne’s revised guidance and -15% to the overall market. Today, Teradyne simply trades at the same price it did three months ago. It’s always important to put these price drops in perspective.

Teradyne’s Q4 Earnings Report

Let’s start with looking at how 2021 panned out for Teradyne, now that they’ve released fourth-quarter earnings for 2021. Revenues grew 19% compared to 2020 with earnings up 29%.

Full Year Sales for Teradyne
Credit: Teradyne

Revenue growth is on track for this profitable company that has grown revenues 15% per year since 2017 and earnings at 26% per year. Regarding the latter, profitability isn’t something we typically focus on for growth firms, but Teradyne gives us the best of both worlds. They’re growing and they’re profitable, with $1 billion in cash which provides dry powder for growth through acquisition.

So why did shares plummet on such good news? Because Teradyne revised their guidance in the short term (negative news), which wasn’t enough to offset their guidance in the longer term (positive news). Since today’s FOMO YOLO investor expects every stock they invest in to be the next Tesla – like now – this news wasn’t taken very well.

Why Teradyne Stock Price Fell

Notable figures in the finance world such as Warren Buffett and Jamie Diamond believe that quarterly guidance should be done away with because it encourages a focus on short-term rewards at the expense of the long-term rewards investors should be focused on. Executing consistently on a yearly basis should be the focus, and what happens in the middle is business as usual. Teradyne’s short-term guidance largely surrounds the first and second quarters of 2022.

At the lower end of their guidance, Teradyne expects $700 million in Q1 revenues and roughly $814.5 million in Q2 revenues (the earnings call forecasted “about 25% lower than Q2 2021“). This translates into the first half of 2022 coming in at $1.51 billion vs. the $1.87 billion that was realized in 2021 – a drop of about 19%. Per the Q4-2021 earnings call:

We are modeling first half sales down 15% to 20%. We don’t expect the impact of this to extend into second half. We expect demand to accelerate again in 2023 as we begin to see the complexity growth related to investments for 3-nanometer, gate-all-around and advanced packaging.

Credit: Teradyne Q4-2021 earnings call

In the same call, the CEO talks about how they haven’t been very good at estimating what the second half of any given year will look like. All that uncertainty represents risk, but here’s why long-term investors should disregard this banter for what it is – unnecessary noise – and focus on the bigger picture.

A Good Teradyne Stock Forecast

As long-term investors, we mainly care about the long-term guidance. Here’s what that looks like after Teradyne revised 2024 estimates upwards by nearly a third on revenues and over a third on earnings-per-share:

Teradyne revised 2024 estimates upwards by nearly a third on revenues and over a third on earnings-per-share
Credit: Teradyne

The good news is that Teradyne increased their 2024 revenue forecasts by 27% and their 2024 earnings-per-share forecasts by 33%. On the road to these riches, there will be some short-term setbacks. One reason why the market might be penalizing Teradyne so hard is the same reason growth stocks are getting hammered. With interest rates set to rise, a dollar today is much more valuable than a dollar two years from now. Wall Street analysts value companies using sophisticated spreadsheets that discount future cash flows a lot more given the possibility of rising interest rates. However, this level of detail creates too much noise, and we’re largely focused on evaluating our original thesis to see if anything has changed.

The earnings call transcript is an interesting read which quickly descends into lots of complexity. Analysts are paying very close attention to every detail provided, and their questions reflect how much they’re thinking this stuff through. Question of the day goes to the Goldman Sachs analyst who asked of the industrial robotics segment, “why wouldn’t this grow 60%, 70%, 80% as opposed to 35%, 40%?” Those are the sort of hard-hitting questions that help you make MD before 40. But it’s actually a good question, and here’s what the CEO said (from the SA transcript of the call):

That is the million-dollar question that I ask every day and — because you’re absolutely right. The dynamics are there. The ROI is there. Everything is there. The biggest obstacle to sort of faster growth is the unfortunate fact that to deploy a cobot takes a human and it takes a skilled human, a technician, today to spend some number of weeks depending on the application, putting it into production.

Credit: Mark Jagiela, CEO Teradyne

That’s coming from someone who spent nearly 40 years of his career working at Teradyne, so it’s great to see that industrial automation is a major focus for him. That’s why we purchased Teradyne stock in the first place.

Industrial Automation

The entire reason we invested in Teradyne was because of their move into industrial automation, a segment of their business which grew 31% in 2021. Industrial robotics is commonly mentioned by Teradyne as a driver of future growth, and they’re expecting the segment to grow from 10% of the 2020/2021 sales mix to 18% by 2024.

The Teradyne 2020/2021 sales mix and 2024 sales mix.
Credit: Teradyne

The stock is a long way from being an industrial robotics pure play, but they’re growing the business as expected, and perhaps more acquisition opportunities will grow that number to an even larger percentage.

In the latest earnings call, the CEO talks about how their cobots are being used for a use case that’s been coming up a lot lately – warehouse automation.

One of our partners, Nimble Robotics, uses AI, unique grippers and clever software on our UR cobot platform to pick consumer goods and high-volume warehouse operations for numerous national brands.

Credit: Mark Jagiela, CEO Teradyne
Click for company website

Founded in 2017, Nimble Robotics lists one round of funding in Crunchbase – a $50 million Series A they closed last March and used to double their workforce. Among the list of investors is notable AI academic Fei Fei Li who joined the company’s Board of Directors alongside another AI heavyweight, Sebastian Thrun. “Their robots have been picking reliably in production, at scale for over a year for some of the world’s largest retailers,” Ms. Li said of the company which uses Teradyne’s cobots to power their platform. Wouldn’t this exciting startup make a great addition to the Teradyne family?

Our Position in TER Stock

The last article we wrote about Teradyne was titled Why We’re Trimming Our Gains in Teradyne Stock. At that time, shares were trading higher than they are today, and the company wasn’t showing they could grow the industrial automation segment. So, we trimmed some shares and recouped our entire investment. Today, growth in industrial automation is finally happening. Maybe they just needed some time to work through their acquisitions, something we covered in an earlier piece – Is Teradyne an Industrial Robot Stock Yet? – which looked at the companies they acquired to enter the industrial automation market.

When Teradyne shares plummeted, we did what investors who can’t manage their emotions do. We immediately checked what impact that had on our paper gains. Turns out we’re still up +220% on the position so no harm done. Contrast that to an investor who bought shares of Teradyne a month ago and sees -30% in paper losses they’re probably panicking about. But no need to worry. If you’re in it for the long haul, this might be a good time to pick up some shares using dollar-cost-averaging.

We’re sticking with Teradyne for the long haul because they’re making great progress on their industrial robotics initiatives. We also don’t mind having incidental exposure to the other investment themes on offer – the semiconductor industry and, to a lesser extent, the 5G thesis. With a market cap of $17 billion, Teradyne hits our size sweet spot as well. They’re also profitable, which means they’re more resilient to economic downturns. We’d prefer they didn’t pay that paltry dividend (amounts to a 0.39% yield) and invested that money in acquisitions instead, but that’s something we’ll need to live with.

Cumulative Capital Allocation Breakdown 2015-2021
Credit: Teradyne

In 2022, they plan to spend $760 million buying shares back and will increase the dividend by 10%, so hopefully, there’s something left over for some acquisitive growth.

Nibbling on some shares at a discount is tempting, and if we decide to do that, Nanalyze Premium annual subscribers will be the first to know. We’ll continue maintaining our position and check back in whenever something meaningful happens, or it looks like our thesis is changing.

Conclusion

We always check in with a stock when there are meaningful corporate events or extreme price movements. The information Teradyne made available yesterday was great news on what they accomplished in 2021 and their revised guidance – upwards of nearly a third in revenues and earnings – for 2024. As long-term investors, we’re not so concerned with temporary setbacks as those simply provide an opportunity to purchase shares at a cheaper price, especially when their intrinsic value – at least based on the guidance of their management team – has increased.

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