Teradyne (TER) Stock: Change Could Be Close By

Teradyne (NASDAQ:TER), a provider of robotics and test solutions for semiconductors and electronic systems, has been more volatile than normal in the past six months or so. The stock went on a huge rally in April thanks to an upbeat earnings report, only for another earnings report to proceed to deflate much of the preceding rally. The stock has been rather indecisive more recently, but there is reason to believe TER may be priming itself for a more decisive move soon. Why will be covered next.

A breakout could be close

An old article from more than 2.5 years ago or January 2022 rated TER a hold after its most recent quarterly guidance was a disappointment. Expectations had gone up, and the stock had rallied as a consequence, but the selloff in the stock in the wake of the report resulted in TER losing all its prior gains. In line with this, the article was titled “Teradyne gives and then takes it back”.

Ironically, the above title is kind of fitting for what has happened recently. Similar to a couple of years ago, the stock went on a major rally after going sideways for months, only to come close to giving it all back as shown in the chart above. The first rally coincided with the release of the Q1 FY2024 report, but the Q2 FY2024 pushed the stock lower with a double-digit decline.

The stock hit a low of $95.80 on April 19, but then took off until it hit a high of $163.21 on July 16. The stock then declined until August 5 with a low of $109.15. Another rally followed, which resulted in another selloff in September. The stock looks like it may be getting ready for another rally, but that does not change the fact that the stock has been rather indecisive lately, with rallies followed by selloffs and vice versa.

However, there is reason to believe change could be on the horizon. Notice that if we connect the recent lows and highs, then two trendlines emerge. On top, there is a descending upper trendline, and on the bottom, there is an ascending lower trendline. As a result, the two trendlines are on pace to converge.

This suggests the recent sideways price action is nearing its end since the stock will no longer be able to stay within the two trendlines, but will instead have to break through either one of them. Note also that the stock stopped just short of the upper trendline on September 11. This could be seen in two ways.

If you are leaning pessimistic, then stopping short of breaking through the upper trendline can be seen as proof that resistance is keeping a lid on the stock’s ability to move up. On the other hand, if you are more optimistic, then the latest moves in the stock can be seen as a sign the stock may be getting ready to punch through and break out of the recent deadlock to the upside. This would be a bullish move.

What caused the recent rally and resulting selloff?

Notice how the recent increase in volatility with rallies and selloffs was preceded by flattish, sideways price action within a fairly narrow price range. As mentioned before, the Q1 FY2024 report was instrumental in putting together the succeeding rally. This was not hard to see because Q1 earnings and Q2 guidance were significantly better than expected. In addition, TER suggested it was seeing increased business opportunities due to AI, something that sounded like music to the ears of the market.

However, if the Q1 FY2024 report was better than expected, resulting in a rally in the stock, then the most recent or Q2 FY2024 report was the opposite. TER actually beat guidance and the consensus estimate for Q2 FY2024 with non-GAAP EPS of $0.86, or $0.09 more than the consensus, on revenue of $729.9M. Q2 FY2024 was, in fact, the first YoY increase in quarterly revenue, following nine consecutive YoY declines in quarterly revenue. The table below shows the numbers in the most recent report.

Click to enlarge

Source: TER

The Q2 FY2024 results suggest TER is recovering from the downturn that led to nine consecutive declines in quarterly revenue, starting in Q1 FY2022. However, the stock still dropped 13% the day after because Q3 FY2024 guidance was weaker than expected. The consensus was expecting non-GAAP EPS of $0.86 on revenue of $716M, but Q3 FY2024 guidance calls for non-GAAP EPS of $0.66-0.86 on revenue of $680-740M.

Click to enlarge

Source: TER

Keep in mind, Q3 FY2023 precedes the recent business transaction with Technoprobe, which saw TER let go of Device Interface Solutions and its contributions. Nevertheless, the latest guidance is significantly worse than expected. TER is expected to rebound from the downturn that caused the top and the bottom lines to contract, but the latest numbers put a dent in the thesis that TER has left its demand issues in the rearview mirror.

What to expect from FY2025?

TER still expects to end FY2024 with an increase in revenue in the low single digits. Using this guideline from TER, FY2024 revenue is projected at $2,756M since FY2023 revenue was $2,676M, which might be enough for around $3.00 in EPS. Remember, FY2023 included full contributions from recently disposed units. From the Q2 earnings call:

“Moving on to Q3, the positive impact of AI on test is expected to continue into the third quarter. However, a meaningful uptick in other end markets, including legacy auto and industrial, may not occur until the 2025 timeframe. As a result, at the company level for the full year, we continue to expect low single digit revenue growth from 2023.”

Source: TER earnings call

The above implies a P/E ratio of 43.8x for TER with the stock at $131.51 as of September 11, which is almost twice as high as the median of other stocks in the sector at 22.8x. However, TER is suggesting FY2025 is when growth will really take off since most end markets remain sluggish. Accordingly, this outlook is incorporated into Wall Street estimates, which range from $3.83 on revenue of $3.19B at the low end to $5.76 on revenue of $4.03B at the high end of estimates. The last one would bring the P/E ratio more in line with the median stock at 21.7x.

TER expects strong earnings growth

Not everyone may put much weight into these upbeat forecasts, but they are in part based on forward projections from TER itself. The latest financial model from TER sees revenue growing at a CAGR of 13-20% in the three years using FY2023 as the baseline. This implies FY2026 revenue of $3.9B at the low end and $4.6B at the high end of the model.

The model includes gross margins of 59-60% and operating margins of 28-32%, resulting in non-GAAP EPS of $5.50-7.50 by FY2026. In comparison, TER earned $2.93 on revenue of $2,676M in FY2023. If we take the midpoint of $5.50-7.50 or $6.50, then earnings are projected to grow by 30.4% on average per year in FY2023-2026.

It would also surpass the record high in FY2021 when TER achieved revenue of $3,703M and non-GAAP EPS of $5.98, before the downturn took down the numbers. TER thus expects to recoup all its past losses and then some during the downturn that led to contraction in nine quarters from Q1 FY2022 to Q1 FY2024.

Such strong earnings growth helps explain why the average price target from 18 Wall Street firms for TER is $143.95. Keep in mind, all of this is predicated on TER hitting the targets laid out in the financial model, which in turn requires that demand is much better than it has been in the last 2-3 years. The recent end to the quarterly contraction in revenue and a return to YoY growth is a positive sign, but if the recovery does not accelerate from here on out, or worse stalls, it becomes hard to see how these numbers from TER can be attained.

Investor takeaways

TER has seen more volatility in the past half year or so after some boring range-bound price action. The stock took off after the Q1 report essentially signaled the end of the contraction that lasted nine consecutive quarters, but TER came close to giving it all back when the latest guidance was weaker than expected.

This is similar to past episodes where TER gives and then takes it back. The stock has stopped declining, but it has been indecisive lately by going up and down. Still, the charts are leaning slightly to the bullish side with the stock close to breaking through a trendline that has kept the stock contained up to now.

Keep in mind the breakthrough has yet to occur, and TER still finds itself stuck between two converging trendlines. It is still possible for TER to fall below the trendline that has provided it with support, which, unlike the prior bullish scenario, is more on the bearish side. It’s also possible the stock could continue to do what it has been doing lately, which is to consolidate around past gains.

The stock may postpone deciding where it wants to go until there is more clarity as to the state of recovery out of the downturn that caused the numbers to shrink at TER. TER is seeing signs of strength and the outlook calls for growth to accelerate in FY2025, but it also acknowledges most end markets have yet to recover with demand in a slump.

The outlook calls for strong growth in revenue and earnings in the next two years, but if TER is to hit the targets laid out in its financial model, demand will need to be better than it is at the moment. TER is actually playing from behind if it is to hit the goals for FY2023-2026. FY2024 will only see growth in the low single digits, which means FY2025 and FY2026 will need to be very strong if FY2026 is to end where TER would like it to end.

Remember also that the current records set in FY2021 were attained under special circumstances. The year 2021 was one of the best years ever for the semiconductor market, if not the best ever, due to massive worldwide stimulus, which helped TER achieve the numbers it did back then. TER is looking to beat those numbers, and while it is not impossible on paper, it arguably looks like a tall order. TER could get it done eventually, but TER may need more than the time it has allotted to itself to get there.

There is ground for caution here, which is why I am neutral on TER. Multiples indicate that TER is priced for strong growth in the near term, but that kind of growth may be difficult to achieve, especially if the semiconductor market does not improve much more, or worse deteriorates. Q4 guidance will need to be much better than Q3 guidance, or the concerns that caused the stock to drop after its most recent report could snowball into something worse.

In the end, whether long TER is worth considering comes down to if TER can achieve the growth as laid out in the current financial model, which calls for aggressive growth in the next couple of years. At this time, TER is not there and instead playing from behind. If one has doubts about the fairly ambitious goals, then standing on the sidelines is best.