Teradyne Earnings: 2024 Rebound Is Coming Slowly, but Shares Remain Tremendously Undervalued

We lower our fair value estimate for shares of wide-moat Teradyne TER to $147, from $157, after it reported a quarter in line with our expectations but provided weaker forward-looking commentary. Teradyne’s primary semiconductor testing market continues to be weighed down by low smartphone demand and a precipitous downturn in the memory chip market. We think the overall chip test market has troughed and view management’s outlook for growth in 2024 positively even as management’s commentary was more tepid than we’d hoped. Teradyne’s chip exposure opens it up to cyclicality as we’ve seen the past two years, but we are undeterred in expecting long-term growth drivers toward higher chip complexity over the course of these cycles. Teradyne is well-positioned to profit from a cyclical rebound in our view, and we continue to see the firm as the preeminent player in chip test with a durable wide economic moat. Despite our fair value trim, we see shares as deeply undervalued. Current prices imply practically no rebound from Teradyne’s cyclical trough, and we see improving demand as a catalyst in 2024.

Third-quarter sales dropped 15% year over year but rose 3% sequentially to $704 million. Semiconductor test sales, which make up about 70% of the top line, rose 5% sequentially, showing some modest recovery. In chip testing, automotive, industrial, and computing sales are actually doing well, driven by trends toward electric vehicles, the internet of things, and artificial intelligence, or AI. However, smartphones are Teradyne’s largest chip test exposure and the smartphone chip market is very weak in 2023, which weighs on results. Elsewhere, Teradyne’s wireless and system test markets declined due to weak telecom equipment spending and a depressed hard disk drive market. Positively, the robotics segment rose sequentially and management’s commentary was bullish about a robotics recovery.