Teradyne Stock: Where’s the Robotics Exposure?

Regular readers have likely followed our recent search for the best semiconductor stocks. We went down quite the rabbit hole to identify a company in the form of Nvidia (NVDA). Its graphics processing units (GPUs) have helped it take a dominant position in various industries and sectors related to computing, including AI chips, data centers, gaming and the metaverse, and (at least at one point) crypto -mining. But not every investment play has to be a pure play. Sometimes the best option is to go with the pick-and-kick game. Or both.

We originally went long on Teradyne (TER), which automates testing for semiconductors and a variety of other electronic and digital gizmos, because it was long on industrial automation by acquiring four robotics companies in the span of four years. Our thesis was that Teradyne would eventually provide significant exposure to the robotics theme. Unfortunately, this is not happening as quickly as we would like. As we continued to wait, we were distracted by the fact that the Baawston-based company is also a pick-and-scratch play on AI and automation. It’s a major service provider to big-name customers like Samsung, Qualcomm, and Intel that power things like supercomputers, smart devices, and smartphones. Like Nvidia, it offers both direct and indirect exposure to various emerging technologies.

It’s been a little over a year since we last checked in on Teradyne, in an article we optimistically called Teradyne Stock: The Forecast Looks Better Than Ever. At the time, the company had just posted record profits, but the stock took it on the chin because management actually offered fairly transparent guidance for the first half of 2022 that suggested revenue headwinds. Although we don’t have the SEC report for 2022 yet, Teradyne held an official presentation late last month. Let’s see where things stand with Teradyne stock in 2023.

The chips are down and customer concentration is up

And let’s start with the bad news. Annual revenue fell about 15% in 2022, from $3.7 billion to $3.2 billion. Based on that estimate, Teradyne accounted for about 37% of the market share with $1.7 billion in revenue. Bottom line is that the test revenue – Semiconductor test (includes SoC testing and memory), System test (something to do with data storage and defense systems), and Wireless test (connectivity and all that) – was pretty lackluster.

Revenues fell by 15% in 2022. Credit: Teradyne

The company warned investors of more of the same in 2023. For example, it predicted that the market for SoC testing would contract between 10% and 30% below last year’s $4.6 billion level, so expect another drop in SoC- test income. The management naturally tried to put a positive spin on things. Mass production of 3-nanometer chips is supposed to pick up steam this year, so that could help offset softness in other parts of the company’s test markets. Specifically, Teradyne said its “historically largest end customer” is expected to lead this transition. It’s either Samsung or (more likely) Taiwan Semiconductor. While the latter is the world’s largest semiconductor manufacturer, the former got a boost last year with the production of the first generation of 3-nm chips. Regardless, that customer will move from less than 10% of 2022 revenue to a low double-digit percentage of revenue for this year.

Teradyne serves two markets within its semiconductor testing division. Credit: Teradyne

Customer concentration is an ongoing problem for Teradyne. In 2021, the company’s five largest customers accounted for 33% of its total revenue. Taiwan Semiconductor alone represented nearly 19% of its 2021 consolidated revenue and was as high as 25% in 2020. Last year, Qualcomm was the only company that management said accounted for at least 10% of total revenue, although we don’t do know the full picture until the 10K reaches the kiosk. Regardless, Teradyne depends on a disturbingly small number of customers.

The summary about robots

Now, to industrial automation (IA), also known as robotics, the reason we invested in Teradyne in the first place. Revenue rose just 7%, from $376 million in 2021 to $404 million in 2022. That’s a big slump after Teradyne’s robotics division’s revenue jumped 34% between 2020 and 2021. Blame a strong U.S. dollar for the decline in revenue, according to company executives, who said revenue growth was actually 15% in constant dollars. That makes sense, because 65% of 2022 sales were outside the United States, including 40% in Europe, 11% in China, and the other 14% spread across the rest of the world.

The biggest and baddest cobot yet from Universal Robots. Credit: Universal Robots

The biggest piece of the pie comes from Universal Robots, which Teradyne acquired in 2015 for $285 million. Last year, the subsidiary contributed $326 million. The robotics company also introduced its strongest cobot yet, the UR20, which can move payloads up to 45 pounds despite weighing only about 140 pounds. Mobile Industrial Robots (MiR), which Teradyne added to the group in 2018 for $148 million, accounted for $77 million – a 19% increase in revenue from the year before.

Not exactly R2D2? Credit: MiR

Just like its test markets, Teradyne expects the IA division to face an uphill battle in the first half of this year before rolling to victory in the second half. Why the optimism? Well, the company does not believe that currency exchange will be such a problem in 2023. In addition, Teradyne is building its customer base outside of traditional distributors and in manufacturing, which will grow 26% in 2022, among other verticals. Finally, the company believes the new UR20 will drive sales, leading to more than 20% growth in 2023 revenue, mostly loaded on the back. (More on this in a bit.)

The Bull Case for Teradyne Stock

One thing we like about Teradyne stock is that the company provides a lot of data and analysis, and management clearly explains what’s going on with what. Here we see that the company has revised its mid-term outlook to 2026 based on the current market weakness.

Look to the future. Credit: Teradyne

Based on near-term conditions, the 2026 figures look quite optimistic. Management is positive for a few reasons. He believes markets such as AI and cloud computing, mobile processing and automotive – particularly advanced driver assistance system ADAS and electric vehicles – are increasing the numbers and complexity required of semiconductor hardware. Ditto for markets serving wireless standards for supporting “increasingly larger data volumes and the pervasive deployment of edge AI.” Teradyne has automated test equipment for all of these technologies. We also want to add that Teradyne is likely to benefit from the passage of last year’s so-called CHIPS Act, which pours $280 billion into all kinds of emerging technologies, including $52 billion in subsidies and additional tax credits to companies that make chips in the United States, over the next five years. The EU also approved similar legislation last year.

Teradyne leadership also said IA will help drive revenue growth in the next few years. The thinking is that all the global sleeper labor shortages and wage pressures will spur more companies to automate. They also claimed that market penetration for collaborative robots, including the small mobile autonomous robots that hover around factory and warehouse floors, is less than 5%. The big announcement was that the company believes robotics revenue will reach $1 billion, representing about 20% of total revenue, by 2026. The new CEO, Greg Smith, was most recently president of the IA Group, so presumably he knows what he’s talking about he speaks To achieve this target, the Industrial Automation segment will need to grow at a 25% compound annual growth rate (CAGR) over the next four years (reflected in green below).

Credit: Nanalyze

After waiting another four years, provided the company hits that aggressive target, we would only have 20% exposure to industrial robotics, which is why we hold the stock in the first place. Our last piece on Teradyne talked about the company promising that industrial robotics would be 18% of the mix by 2024 (an implied revenue of $887 million). Now we are being spun a much less appealing story. It’s awfully tempting to find a better way to play the exposure of robotics and trade out Teradyne.

The Bear Case for Teradyne Stock

The last time we checked in on Teradyne stock, the forecast model then went out to 2024, looking decidedly stronger. We hope this doesn’t become a case of the goalposts being moved forever. Additionally, the total addressable market for its core market in semiconductor testing is only about $5.6 billion between SoC and memory. Based on the company’s dominant market share, we wonder if slowing revenue growth will be an issue going forward.

The future looked better in the past. Credit: Teradyne

However, our main concern is with China, and we are not talking about balloons. Well, in a way we are. While we refuse to indulge in political banter about Nanalyze, politics do have a way of entering into the conversation with regulations. Specifically, the US Department of Commerce has placed new restrictions on the export of semiconductor-related technologies to China, including sales of semiconductor testers. The regulations will certainly affect Teradyne, although the company is still assessing the impacts and looking for solutions such as applying for a slew of licenses and waivers to continue certain operations. Yet this could be particularly disruptive, as China accounts for 16% of total revenue. From the Q3-2022 report: “[T]The regulations could have an adverse impact on certain actual or potential customers and on the global semiconductor industry.”

China represents one of Teradyne’s largest markets. Credit: Teradyne

So add regulatory risk along with customer concentration to the list of red flags we need to watch going forward.

Closure

They are good reminders that no matter how well positioned a company appears, it has its own unique vulnerabilities. As usual, the question comes down to risk. While customer concentration is a concern for Teradyne, there is no reason to believe its biggest customers are leaving. In fact, given the global need for semiconductor technology to power everything from our toaster oven to our electric car, long-term business prospects look pretty good. The argument for accelerated industrial automation in robotics also makes sense to us, although even if Teradyne manages to hit its $1 billion target within three years, our exposure to industrial robotics will still be minimal. Where is the robotics exposure we were hoping for?

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