Can AI Tailwinds Drive Teradyne Stock HIgher?

AI workloads require significant computational power, and higher memory capacity, and rely on advanced manufacturing processes. AI chips also have more complex architectures and require greater integration. This, in turn, calls for more sophisticated testing solutions leading to higher demand for automated test equipment (ATE) that Teradyne produces. ATE plays a crucial role in enhancing the production yield and improving chip performance by ensuring that chips meet design specifications. Teradyne has indicated that strong demand for its ATEs is currently being driven by Cloud AI products with the memory segment of its semiconductor business seeing the strongest growth over the last quarter, with sales rising by about 60% compared to last year, led by surging demand for high-bandwidth memory used in AI applications. Teradyne also sees growth in the compute space pick up, projecting that revenue from its compute segment in 2024 to be approximately four times the 2023 levels. The company is increasing its serviceable addressable market forecast in the compute space to $1.8 billion in 2024, reflecting a 30% growth compared to 2023. Additionally, testing times have been on the rise due to the growing complexity of devices. Teradyne anticipates that this could lead to meaningful opportunities for its system-level test solutions in the AI accelerators space. As an aside, see Can A New Fab Process Boost Intel Stock?

Is The Stock Attractive?

The increase in TER stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 37% in 2021, -46% in 2022, 25% in 2023, and 17% in 2024. The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could TER face a similar situation as it did in 2022 and 2024 and underperform the S&P over the next 12 months – or will it see a strong jump?

While the semiconductor business is growing, other segments have been mixed, which has weighed on overall growth. The Robotics segment is facing lower demand, particularly as automotive and manufacturing companies in Europe scale back investments. Additionally, the wireless business has encountered headwinds due to the slower-than-expected adoption of Wi-Fi 7 devices. Overall revenues are projected to grow by just about 5% in 2024. Things could get better for Teradyne in the near-t0-medium term. Spending on 300mm semiconductor fab equipment is projected to rise by 4% to $99.3 billion in 2024, with a further 24% surge to $123.2 billion in 2025 according to estimates from SEMI, driven by higher demand for AI chips. This should help drive Teradyne’s overall growth higher given that the company’s semiconductor test business remains its largest. In Q3 2024, while the company’s total revenues stood at about $737 million, approximately $543 million came from the semiconductor test business (about 74% of total revenue). Revenue growth is expected to accelerate, with consensus projecting 20% growth for FY’25. Considering this we believe that Teradyne’s stock is relatively reasonably valued at about $134 per share, or 32x consensus 2025 earnings.