TER - Teradyne: Costly Robotics Experiment

2024-01-18 05:12:10 ET

Summary

• Teradyne's strategy of diversifying into the robotics market is not paying off as it faces significant challenges.
• The robotics distraction also causes the company to lose market share in its core testing segment.
• Teradyne should review its robotics strategy before it gets too late.

Thesis

Teradyne ( TER ) is a leading provider of automated test equipment for semiconductors, electronics systems, and wireless devices. The company also offers collaborative and autonomous robots for industrial applications. For years, Teradyne has dominated the semiconductor testing market with near 50% market share. However, the company’s recent financial results reveal that it is losing its competitive edge and facing multiple challenges in both its testing and robotics segments.

First of all, Teradyne’s robotics strategy looks like a costly experiment that is not paying off and eroding shareholder value. The company is investing time and resources to scale its robotics business, but revenue and margins are not keeping up. Moreover, the company’s focus on robotics is distracting it from its core testing segment, which generates almost 90% of its total revenue and all of its operating income. As a result, the company is losing semi testing market share to its main competitor, Advantest.

We believe that Teradyne should review its robotics strategy and rather concentrate on protecting and enhancing its core testing business, as it is still a dominant player in the semiconductor testing market. In this article, we will examine the main challenges that Teradyne faces, and provide our valuation and recommendation for the stock.

Teradyne’s Testing Business is Losing Market Share

Teradyne’s main source of revenue, its testing business, is facing a significant drop in demand. The company’s testing revenue fell by 16% year-over-year in Q3 2023 , largely due to reduced orders from its communication and industrial customers. This marks the seventh consecutive quarter of testing revenue decline for Teradyne, and the company expects Q4 to follow the same trend (see below). The company’s gross margin also shrank by 2 percentage points, due to the negative effect of lower volumes.

The semiconductor testing industry is closely aligned with the overall semiconductor market growth. According to the WSTS report , the semiconductor market experienced a 2% growth in 2022, a 9.4% decline in 2023, and is projected to grow by 13% in 2024 (see below). However, this trend does not match the performance of Teradyne's Testing revenue, which has been dropping for two consecutive years.

We believe that Teradyne is losing ground in the semi testing industry to its main competitor, Advantest ( OTCPK:ATEYY ). According to Seeking Alpha analyst Marcel Knoop’s estimates , Teradyne’s market share in the semi testing segment has fallen from about 45% in 2021 to 38% in 2023. This suggests that Teradyne is losing its leadership in the semiconductor testing market, which is very worrisome.

Industrial Robotics is a Very Different Market Than Semiconductor Testing

Teradyne wants to go after high-growth markets and is betting on its Robotics segment to accelerate its business growth. However, the robotics business, which accounts for about 12% of its total revenue, is facing significant headwinds. In Q3 2023, the company reported a 4% year-over-year decrease in robotics revenue, mainly due to lower demand for its UR and MiR robots in the industrial sectors. The overall trajectory for the Robotics segment also doesn’t look much promising (see below). The company's robotics revenue has grown at a CAGR of only 5% from 2018 to 2023, compared to the global robotics market CAGR of 15.9% in the same period.

The issue is that the robotics market is very fragmented and challenging, with many competitors that provide similar solutions. Companies like ABB, Yaskawa, Fanuc, Kuka, Omron, and Siemens are competing for customers by offering different advantages in terms of product innovation, quality, price, and customer service. These industrial incumbents also have more established supply chains, sales networks, and customer relationships, making it harder for new entrants to gain a foothold in the market. Teradyne’s robotics products, such as its Universal Robots cobots and MiR mobile robots, are struggling to compete with these players for larger deals as they have limited market presence. Teradyne's financials also show that the robotics segments is not profitable and continues to lose money. (see below)

Teradyne Has a Strategy Problem

Until now, Teradyne's strategy of diversifying into the robotics market has not paid off, as the company has failed to achieve meaningful growth and profitability in this segment. Teradyne's strategy of acquiring smaller robotics companies has also been questionable, as the company has not been able to integrate them effectively and generate synergies. The company has not been able to create a unified brand identity and value proposition for its robotics portfolio, nor has it developed a coherent strategy to address the diverse needs and challenges of different industries and applications. Teradyne’s robotics group operates largely independently, which results in inefficiencies, and missed opportunities.

Our view is that industrial robotics is a very different business than the Teradyne’s main semiconductor testing business and has very different dynamics in terms of manufacturing, supply chain, distribution and sales. We don’t see any synergy between the two businesses. This lack of synergy and distraction is also affecting Teradyne’s core testing business, as the company is losing market share to its biggest rival. We believe that Teradyne should review its robotics strategy.

Valuation

Teradyne's valuation is too high, considering its declining financial performance and weak growth prospects. The company has a P/E ratio of 34, which suggests a strong earnings growth outlook, but this is unrealistic considering the company’s challenges in the testing and robotics segments. The company's EV/Sales ratio is 5.6, which is also higher than the industry averages. We think that the market assigns these high multiples, because of its robotics business. Our view is that Teradyne is overvalued and does not offer a margin of safety for investors.

Conclusion

In conclusion, we think that the company should focus on its core testing business, which is more aligned with its capabilities and customer needs. Teradyne has a great opportunity to leverage its testing expertise and technology to serve the growing demand for semiconductor and electronics testing. The industrial robotics market has different dynamics, is highly competitive and fragmented, and Teradyne does not have a clear competitive advantage or differentiation. Plus, it is diluting its profitability and cash flow, as it requires significant investments in R&D, marketing, sales, and customer support.

The company is also facing declining demand and increasing competition in its core market. The company's financial performance and growth prospects are weak, and its valuation is too high. Therefore, we recommend investors to avoid Teradyne stock, as it is likely to underperform the market in the long term.

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