Teradyne Earnings: We Maintain Our Long-Term Recovery Thesis and Fair Value Following Good Quarter

We maintain our $157 fair value estimate for Teradyne TER after the firm reported good second-quarter results amid the throes of a chip downturn. Teradyne raised its view of the overall chip testing market for 2023. While we still expect weak results through 2023, a more positive outlook for the second half supports our belief in a strong rebound to begin in 2024. However, the firm’s robotics business is struggling in 2023 and weighing on overall results. The chip business is the primary driver of results and our long-term thesis on Teradyne. We reiterate our view that Teradyne has sold off excessively on a chip downturn and that current levels provide strong upside for investors. Teradyne is a behemoth in chip testing, which earns it a wide moat and positions it well for secular growth through cycles. The shares continue to look cheap to us.

Second-quarter sales dropped 19% year over year but rose 11% sequentially to $684 million. Year-over-year declines show the impact of downturns across the firm’s served markets; we see the sequential increase as mostly reflecting normal seasonal strength in the second quarter. Semiconductor test sales rose 14% sequentially, beating our expectations and showing strength out of the memory, automotive, and industrial markets. The system and wireless test markets are in downturns of their own, which we expect to last through 2023. Robotics sales were poor, declining 29% year over year and 19% sequentially. Teradyne’s robotics business is concentrated in Europe, where industrial spending has been weak. We still see robotics as a secular high-growth story, but 2023 shows it isn’t immune to the macroeconomic environment.

Profit margins improved in the quarter, in part due to some supply-constraint-related costs being pushed into the second half. Non-GAAP operating margin of 22% rose 5 percentage points sequentially but is well below our midcycle expectation of 30%. We expect margins to return to better levels on a market rebound.