Teradyne (TER, Financial) is an exciting company operating at an inflection point in technological history. Indeed, it is one of the businesses at the forefront of the robotics market, though its revenue is predominantly sourced from semiconductor test systems. While it may work as a long-term investment, it is exposed to cyclical market dynamics, meaning heavy volatility should be expected. That said, looking at a shorter time frame of three years, the enterprise value CAGR implied in my conservative valuation model is upwards of 15%.

Operational and financial analysis

Teradyne is a global leader in automated test equipment and industrial automation, primarily serving the semiconductor, electronics, and manufacturing industries. Its revenue is dominated by semiconductor test systems, which are driven by demand for AI and high-performance computing chips. The company also offers system test solutions for complex electronics and wireless test systems through its LitePoint brand. Additionally, Teradyne has a growing industrial automation segment focused on collaborative and mobile robots—this is an area of potentially high long-term growth for the company.

In recent years, the company has been experiencing contraction and slow growth rates, with only an 8.35% year-over-year normalized EPS growth expected on consensus for FY24, compared to 33.5% for FY25 and 42.3% for FY26. This has opened up an opportunity to capitalize on momentary bearish sentiment, as the stock's price is down 5.55% year-to-date.

The key catalysts contributing to substantial growth in 2025 and 2026 include the increasing complexity of AI chips, particularly in high-performance memory and AI accelerators, which are widely forecasted to drive demand for Teradyne's semiconductor test systems. AI-related applications are pushing longer test times and higher utilization rates, which will further fuel demand for Teradyne's advanced testing solutions. In addition, while accretion from its system-level testing solutions is only going to moderate for FY24, growth from this segment of operations in 2025 is likely to be robust, with new clients anticipated by management in the mobile and computing sectors. While the robotics segment faced challenges in 2024 due to low purchasing managers' index levels and high interest rates, Teradyne is broadening its product offerings, including high-payload robots and original equipment manufacturing solutions. In 2025, industrial automation demand has a high likelihood of recovering with a better macroeconomic environment, and this segment is expected to contribute more meaningfully to revenue growth.

Of its core direct competitors, two stand out as particularly dominant, namely Advantest Corporation (ATEYY, Financial) (ADTTF, Financial) and Keysight (KEYS, Financial). Teradyne's closest competitor in the semiconductor test market, Advantest, holds a significant share of the automated test equipment industry; both companies compete as leaders in testing solutions for complex semiconductor devices, particularly in areas like AI chips, memory, and 5G technology. Keysight competes with Teradyne in the mixed-signal and RF testing markets, providing extensive measurement tools for wireless communications, 5G, and IoT devices.

As the above charts show, Teradyne currently offers close to the lowest EV-to-EBITDA ratio of the three companies, slightly above Keysight. However, it also has the lowest EBITDA and has shown a significant decline in this in the past two years. This indicates that the current valuation may be reasonable.

Valuation analysis

For my valuation model, I will be using a period of three years because the company is highly likely to be able to sustain growth for this period. Indeed, the company is exposed to cyclical industry dynamics given that it predominantly serves the semiconductor markets and is reliant on favorable interest rate environments to stimulate demand for its robotics capabilities.

By December 2027, the company could quite easily deliver annual revenue of $4.7 billion. The current high estimate for FY26 is $4.57 billion, so my FY27 estimate is conservative. The company has already seen record memory revenue in 2024 due to AI-related demand, and this trend is likely to accelerate as AI infrastructure expands. In addition, the ongoing shift toward more advanced semiconductor nodes, such as 3nm and eventually 2nm, from key players like Taiwan Semiconductor Manufacturing (TSM, Financial) will require increasingly complex and precise testing equipment, positioning Teradyne well.

The company has an EBITDA margin of 30.24% as a five-year average. However, it is currently much lower, at 23.4%. During the Q3 2024 earnings call, CFO Sanjay Mehta mentioned that the company expects its gross margins to improve due to a favorable product mix, particularly driven by higher-margin semiconductor test products. This improvement in its gross margins, combined with operational efficiencies, suggests potential for EBITDA margin expansion. Moreover, AI-driven demand will be driving revenue growth while likely maintaining cost controls. Therefore, I am going to use an EBITDA margin estimate of 27.5% for December 2027, resulting in an EBITDA estimate of $1.293 billion for Teradyne.

The company has a 10-year median EV-to-EBITDA ratio of 15.4 and a five-year average EV-to-EBITDA ratio of 18.4. Currently, it is 25.54. This is somewhat justified if the company delivers a robust 35% normalized EPS growth rate in FY25 and 45% in FY26. The company's 10-year EBITDA annual growth rate is 20.6%, but based on my estimate that it will deliver $1.293 billion in EBITDA by December 2027, the indicated three-year EBITDA CAGR is 21.19% from the December 2024 consensus estimate. To be conservative, I will be using a terminal multiple of 20 in my valuation model, which is approximately the midpoint between its current and 10-year median EV-to-EBITDA ratios. The result is a conservative December 2027 enterprise value estimate of $25.86 billion for Teradyne. The current enterprise value is $16.36 billion, so this indicates a CAGR of 16.5% over three years.

Teradyne's weighted average cost of capital is 14.54%, with an equity weight of 99.48% and a debt weight of 0.52%, with equity costing 14.596% and debt at 3.802% after tax. Discounting my December 2027 enterprise value estimate of $25.86 billion back until November 2024 at a discount rate of 14.54% gives a present implied intrinsic enterprise value of $17.21 billion. Given that the current enterprise value is $16.36 billion, the implied margin of safety for investment is 5%. Therefore, Teradyne is a ‘buy'.

Risk analysis

While Teradyne is appealing as a long-term investment, primarily due to its exposure to high-growth AI and robotics markets, it is also prone to significant volatility in its valuation due to its reliance on the cyclical semiconductor market. Therefore, long-term investors in Teradyne should monitor the company's operational performance and the aptitude of management, as well as industry growth trends and macroeconomic factors, rather than look at the volatility in its price through cycles of growth.

In addition, the company operates a fully geographically diversified business model, with 14.4% of revenues from Taiwan, 11.8% from China, and 16.2% from the United States. Therefore, this opens up significant complexities in its international trade. In response to U.S. export controls implemented in October 2022, the company relocated approximately $1 billion worth of manufacturing operations out of China. However, it still operates manufacturing facilities across global regions. Given that we may be entering a new era of multipolar tariffs under the impending Trump administration, the company may find that its heavy geographic diversification is not beneficial to its margins. This is one primary reason why I think the company could face significant headwinds over the next few years that reduce the returns outlined in my three-year investment thesis.

Conclusion

Based on my analysis, Teradyne stock may be attractive. The company is approximately fairly valued, and the implied enterprise CAGR over three years in my conservative valuation model is upwards of 15%. With long-term exposure to robotics and high-demand AI, the investment can also work as a long-term holding, but investors should be prepared for significant volatility in relation to the company's reliance on semiconductor cycles for its growth.