This article is sponsored by Jeff Bowen for Austin Mayor!

About Teradyne

GOAT talk activated.

Michael Jordan and Steve Cohen have two things in common.

They both loved the allure of their respective sports and their departures were reverberated by those on the sidelines and also those in the game.

Jordan left the court for one last time as the greatest to ever do it, and there is not a single doubt in anyone’s mind that Cohen will leave the game known as one of the best to ever do it.

From initially making $8,000 on his first day of trading at a firm by the name of Gruntal & Co., over the years Cohen showed everyone that his track record of excellence hardly knew any bounds, running money for Gruntal for nearly fifteen years, then charting a new course and starting his own hedge fund, now managing just about $30 billion for institutions and high-net-worth (HNW) individuals.

And now Cohen is done trading, with his esteemed fund Point72 continuing to operate, with Cohen staying on as co-chief investment officer for the firm, but ultimately taking a big step back and relinquishing some more investment control to the leadership he’s appointed and his other associates.

One of my favorite lines from the production Hamlet is “Lord, we know what we are, but know not what we may be,” and it is safe to say that when it comes to Mr. Cohen, he is one of the few people in this world that won’t ever have to worry about what he may be.

It would also be a bit negligent if I didn’t mention that prior to raising his successful Point72 investment firm, Cohen’s first fund, SAC Capital, folded as a result of some pretty substantial insider trading allegations (but that’s another story, I suppose), allegations including trading on material, non-public information retrieved from insiders at publicly traded companies. 

Although Cohen himself wasn’t criminally charged, the accusation(s) certainly tarnished his and his firm’s reputation on Wall Street, but clearly not for long.

One can find an outline of the ordeal here, by the way.

So why the heck is this my introduction for a random technology company that goes by Teradyne?

Well, to tell you the truth, I glanced through Point72’s most recently published 13F and Teradyne is one of the firm’s few brand new positions, holding a weight of 0.68% of the its portfolio, telling everybody that Cohen and his team had some sort of conviction a few months ago in the company and its prospects, and while I cannot say for sure whether or not Point72 still has a position in the company, history says that Cohen and his bandmates don’t like to trade incessantly, but rather enjoy establishing positions and stick to those positions for extended periods of time.

Regardless of what actually ends up being the case, the short of it is that Teradyne is a technology company, and the longer version is that it has a large presence in the industrial robotics category and technological equipment testing segment of the tech sector.

The company puts together and sells a host of mechanisms and other sophisticated doodads that allow other tech companies to ensure that their devices work prior to them being sold to customers. On the robot side of things, Teradyne aids many industrially oriented firms by designing, programming and manufacturing robots that help drive efficiency, and help companies fill positions that humans either can’t or do not wish to fill.

In offering some more perspective, it is reported that some of the company’s larger clients include Apple, Qualcomm, Samsung, Intel, IBM, Texas Instruments and handfuls of other scaled innovators that you and I, whether we realize it or not, rely on daily.

This being the case, one can simply put two and two together and realize that the onset of the artificial intelligence revolution has presented a period of great expansion and opportunity for a mission critical supplier like this one, with more equipment than ever needing to be tested and more companies across a multitude of sectors looking to leverage AI and automate many of its processes.

There might be some mild cyclicality with this company, as chip demand, for example, can, believe it or not, wane, but when holding the long-term in mind, on the basis of its business divisions alone, Teradyne sure does seem to have a lot going for itself.

Since a sort of framework of the company and what it does has been established, let’s learn more about this company from a financial perspective, on the quest of unveiling whether or not this company’s stock (NASDAQ: TER) seems to be a promising long-term play.

Teradyne’s stock financials

Teradyne boasts a market capitalization of $21.1 billion, an associated stock price of $129.70, a price-to-earnings (P/E) ratio of 42.69 and gifts its shareholder base an annual dividend in the amount of $0.48, and what initially pops out at me is the company’s valuation with respect to its P/E ratio.

Namely, given the investment community’s (basically) tried-and-true view on the price-to-earnings benchmark, and how if any publicly traded security has a P/E that is greater than 20, it is considered to be overvalued with respect to the value of the sum of its parts, or intrinsic value, shares of Teradyne strike me as initially overvalued in this context.

Nevertheless, one would be wise to consider the following.

I added “basically” because, as black and white as everyone would love investing to be, this just isn’t how it goes, and really, it is so much less fun that way. Even though a stock seems a bit pricey, Mr. Market hardly cares about what you or I think, but rather the prevailing sentiment surrounding companies and industries, not to mention a company’s actual growth. In other words, just because it may initially seem as though Teradyne’s stock (NASDAQ: TER) is overvalued, the stock has gone up to its current level for a reason, and for a few very reasonable ones, at that.

Who is to say that its shares won’t just keep going up?

Nvidia, anyone?

Ultimately, this is a game of probabilities, a multitude of risks and oodles of uncertainties.

Sorry, not sorry.

Back to the stock in question, Teradyne’s executive team is in control of just shy of $3.5 billion in terms of total assets along with $961 million in terms of total liabilities, which, for as large and industrial as a company as Teradyne is, it purports a stellar balance sheet, telling me that it has plenty of dry powder at its disposal that can be used to accelerate its AI efforts through continuous internal innovation, but I believe the better long-term way to think about this is through the frame of inorganic growth, or through strategic acquisitions. Particularly, this company has already paved a solid track record of buying out smaller, yet nimbler related technology companies that are able to push the edge of the innovation envelope a bit more than Teradyne on its own, examples being autonomous mobile robot (AMR) company Mobile Industrial Robots (MiR), which is obviously just the most creative company name you’ve ever heard, along with one of its most prized companies, GenRad, among plenty of others that have largely proven to be fruit bearing for Teradyne and its shareholders.

All in all, this company’s balance sheet enables it to continue unlocking value for shareholders, including avenues such as entertaining large-scale share buybacks, consistent annual dividend increases, and a lot more.

Onto the company’s income statement, Teradyne’s annual revenues throughout 2019 and 2023 have been net stable, holding a pretty tight recent range of just shy of $2.3 billion (2019) and $3.7 billion, as accounted for in 2021, with some ups and downs trending throughout other years, speaking a bit more to the company’s cyclical ties and effects thereof. To name a few examples, Teradyne’s revenues are seemingly more correlated than not with the semiconductor cycles, with its sales waning and bolstering during the exact same periods of booms and busts in the chip sector, such as undulations found in the context of the smartphone market, with the same phenomenon occurring as it did with Teradyne and the semiconductor space.

Additionally, I noticed that the company’s revenues dropped between 2022 and 2023, from $3.1 billion to $2.6 billion, and upon performing further research on the matter, this was largely attributed to the chip cycle, but also excess inventory held by its clients in the automotive sector, inherently leading to their customers making less purchases, leaving a bit of dent in Teradyne’s revenues.

All of this to say, this is a company that deals with a lot of cyclicality in the industries and broad assortment of technology customers it serves, and all prospective and current shareholders should be keenly aware of this fact.

Moving onto the company’s cash flow statement, Teradyne’s total cash from operations also during 2019 and 2023 have been fine, still obviously fluctuating with the aforementioned cycles, which was to be fully expected, but the fact of the matter is that the company’s cash from operations are still fairly sizable in comparison to its revenues, just as I initially hoped. For instance, Teradyne’s total cash from operations maxed out at about $1.1 billion (2021), finding a local minima in 2022 at $578 million. This indicates that even for a company such as this one with as many operations under its two main testing and robotics divisions, it is fairly lean (which is also supported by our previous glance at the company’s balance sheet), also implying that Teradyne has a distinguished knack for profitability.

Teradyne’s stock fundamentals

Speaking more to the company’s profitability, Teradyne’s net profit margin is displayed on Charles Schwab’s platform as 18.33%, which I am glad to report is well aligned with some of its direct competitors, with, for instance, another testing company that goes Keysight Technologies reporting a net profit margin of 18.25%.

Although past and current developments matter to a degree, I’d argue that the future matters a heck of a lot more, leading me to mention that as it relates to Teradyne’s net profit margin, its management during recent earnings calls has reported improved product mix, subsequently leading to the company’s gross profit margin extending to approximately 59%, not to mention the company’s planned strategic divestiture of its Device Interface Solutions (DIS) segment, allowing it to have more focus and better streamline its overall operations, continue penetrating much more profitable lines of business and also putting more cash and financing to work towards future technologies.

This invokes a lot of confidence in myself regarding the future of Teradyne’s profitability.

Should you buy Teradyne stock?

In being as objective as possible, there’s hardly any question that Teradyne’s stock (NASDAQ: TER) has been running pretty hot lately, notching a north of 30% return over the last twelve months alone, as this company has indisputably benefited from the AI craze, leading to a rather elevated valuation.

However, pushing the hype to the side and doing what I do best and thinking about the long-term, Teradyne has a lot of excellent qualities, including a pristine, growth-ready balance sheet, solid annual revenues in most recent years, good accompanying total cash from operations and a healthy net profit margin, both on its own and in relation to some of its most direct competition, instead of being between a rock and a hard place, I find myself being between a “hold” and a “buy” place.

At the end of the day, though, I find it more suitable to think about the future and this company’s valued services are on trend, to say the absolute least. While cyclicality is a factor that one must grapple with, I am a huge fan of how Teradyne is reinventing its business with purpose, and I think it is building out a thriving, future-leaning robotics division that will not only supplement its current testing business, but perhaps even eventually surpass it.

Teradyne is a stellar operator and with the long-term in mind, it seems like an excellent potential investment candidate as well, despite its current valuation, which I think it will grow into, but to a degree has also in many respects already earned given the tangible promise the firm has and its proven excellence in execution, even in an ever-changing technology environment.

I offer the company’s stock a “buy” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.

© 2024 MacroHint.com. All rights reserved.