Teradyne’s Jan. 27 Sell-Off Is Myopic; Shares Now Trade at an Attractive Discount to Our $172 FVE

We’re maintaining our $172 fair value estimate for Teradyne, despite shares selling off on weak short-term guidance. Teradyne reported good fourth-quarter results but guided for a steep drop in semiconductor test revenue in the first half of 2022, relating to a slower-than-previously-expected transition at TSMC to its 3-nanometer manufacturing process. Shares dipped as much as 28% in Jan. 27 trading, but we view this as a near-sighted overreaction. We think the slower transition at TSMC is merely pushing out demand for Teradyne’s automated test equipment into 2023. We don’t foresee demand destruction, given Teradyne’s vital role for customers and its equipment being a capital expense that benefits from a degree of separation from volatile short-term supply and demand dynamics. We expect Teradyne’s foregone sales from 2022 to be almost entirely recouped in 2023 and 2024. In fact, management increased its medium-term sales guidance for 2024 to feature stronger growth across all segments--inclusive of the near-term chip testing weakness--which now fits our previously above-guidance model targets. We’re steadfast in our long-term thesis that Teradyne is an invaluable partner to its foundry customers and that it will benefit from greater chip complexity and smaller geometries, regardless of this near-term delay at a single customer. Following Thursday’s sell-off, we view shares as fundamentally undervalued, and view the current valuation as an attractive entry point for long-term investors in a wide-moat firm that we expect to appreciate once the current customer production hiccups ease.