Robust AI Compute Demand Will Drive Expansion In Semiconductor Test Market Share

Key Takeaways

• Strategic partnership with Infineon targets growth in automotive and renewable energy sectors, potentially boosting revenue through sector penetration.
  
• Anticipated growth in the SOC and System Level Test categories through AI Compute demands suggests improved operating margins and shareholder returns.
  
• Teradyne faces challenges in Robotics and Semiconductor Test markets, with risks from weak demand, market concentration, and execution in strategic investments impacting profitability.

Catalysts

Designs, develops, manufactures, and sells automated test systems and robotics products in the United States, Asia Pacific, Europe, the Middle East, and Africa.

• Teradyne is expected to gain market share in the Semiconductor Test (SOC) sector, driven by robust demand in AI Compute, expanding its revenue base with a potentially low single-digit market share increase.
  
• The strategic partnership with Infineon aims to accelerate Teradyne's roadmap in the power semiconductor space, targeting the automotive and renewable energy markets, which could bolster revenue through increased penetration in those sectors.
  
• The company anticipates a significant ramp-up in its System Level Test category, driven by AI Compute demands, suggesting potential for operating margin improvements through capturing higher-value testing opportunities.
  
• Return to growth in the Wireless Test business is expected after capturing most opportunities for WiFi 7 design wins, suggesting an improvement in revenue and potentially net margins with a higher value product mix.
  
• A restructuring focus on Robotics, aimed at improving efficiency and reducing breakeven revenue levels, may lead to enhanced operating leverage, potentially improving earnings as the market environment stabilizes.

Teradyne Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Teradyne's revenue will grow by 14.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.2% today to 24.5% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $6.48) by about March 2028, up from $542.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.2x on those 2028 earnings, down from 32.4x today. This future PE is greater than the current PE for the US Semiconductor industry at 30.1x.
• Analysts expect the number of shares outstanding to grow by 3.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.47%, as per the Simply Wall St company report.

Teradyne Future Earnings Per Share Growth

Risks

• The Industrial Automation market, including Teradyne's Robotics business, has been experiencing prolonged weaknesses, with soft demand and a muted seasonality in orders, which may negatively impact revenue and profitability if it continues to underperform.
  
• The recent restructuring of Teradyne's Robotics division aims to reduce breakeven revenue, but inherently low visibility and continued weak industrial spending present risks that could limit earnings growth from this segment.
  
• Teradyne's growth heavily relies on maintaining a 50% market share among Compute VIPs, but the market is concentrated with few large customers, which introduces a risk of revenue fluctuations if any customer decides to change suppliers.
  
• While Teradyne's Semiconductor Test business saw growth in 2024 driven by AI Compute demand, the test market for HBM is expected to face a slowdown as customers absorb capacity with existing tools, which could lead to flat revenue growth in this segment.
  
• Investments in areas like System Level Test and strategic partnerships with companies like Infineon carry certain execution risks, such as integration challenges or delays that could impact financial outcomes and net margins.

Valuation

• The analysts have a consensus price target of $136.834 for Teradyne based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $165.0, and the most bearish reporting a price target of just $100.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.2 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 30.2x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $108.54, the analyst price target of $136.83 is 20.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.