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Now, let’s jump right into the analysis! 👇

Stock Pick: Teradyne Inc. (TER-US, $22.8B MCAP)

A big trend in investing recently has been thematic investing.

We have seen massively popular ETFs capture flows that align with the “new new thing” of the day. We have seen this across Cannabis, Metaverse, Crypto, and most recently AI.

Additionally, there are other ETFs that are sector-focused. Examples of these are Airlines (JETS), Oil and Gas E&P (XOP), China Tech (KWEB), and Solar (TAN).

These ETFs are helpful tools for investors to gain exposure to an entire industry rather than stock selection.

However… there are some industries that are filled with massive dispersion amongst their holdings. Right now - there is no bigger divide amongst its constituents than in semiconductors.

The market has decisively sorted the semiconductor industry into two buckets: AI and not-AI. The AI basket is massively outperforming other areas of the market. Non-AI semis have been suffering from near-trough demand in cyclicality at the same time that AI semis are experiencing an explosion in demand.

In my last issue, I highlighted this bifurcation in Broadcom which was seeing a decline in non-AI businesses while custom silicon drives the business forward. Broadcom has had a serious run as of late because of this growing AI business line.

So I asked myself - what other companies have AI business lines that people are underestimating? I also looked at Broadcom’s valuation being a little bit stretched and wanted to find something that was priced at much more reasonable levels. I found a good one, with an exciting robotic twist to it.

My pick in this issue continues my recent semi’s series with an under-the-radar play in the space.

Let’s dig in!

• Why now? 👉 The Rise of Robotics

• Overview 👉 What Does Teradyne Do?

• Where Do They Fit in the Supply Chain? 👉 Testing

• Product Suite 👉 Business Units

  Key Driver 👉 AI Opportunity

• By The Numbers 👉 Key Metrics

• Risks 👉 Potential Pitfalls

Why now?👉 The Rise of Robotics

Jensen took the stage at CES in a shinier than usual leather jacket to a pumped up crowd. The man of the moment kicked off the popular tech event with an interesting focus: robotics. In the video he showed to the audience, there was a robot comforting a child while visiting a doctor for a checkup. It was a much more human and gentle approach to what we have seen rapid advancements in: robotics.

Up until recently, a lot of AI capabilities have been focused mostly on language, with the proliferation of LLMs. What is getting more interesting is AI in the physical world. If we can see and perceive objects in real space, why can’t we apply the image models we currently have to robotics?

There are several nuances to this. One is that different items require different care. For instance, you would handle an egg much differently than you would a steel chassis on a car. Additionally, we have a massive amount of data around language and written word: the internet. Is there an equivalent proxy for the physical world? Maybe video, but this doesn’t accurately incorporate depth perception and there quite frankly isn’t enough high quality data in this space as there is in other modalities.

To tackle this problem, AI companies have been focusing on the concept of digital twins. These are simulated environments that aim to copy real world physical spaces in order to understand how objects interact in a system. This will increase the amount of data available for robotics to be further optimized.

While not the primary revenue driver, the robotics division at Teradyne is set to gain from this trend.

Overview 👉 What Does Teradyne Do?

Teradyne is a global leader in developing and supplying automated test equipment and industrial automation solutions. In the semiconductor industry, the company provides highly sophisticated systems that test a wide range of chips—from microprocessors in smartphones to complex systems-on-a-chip in automobiles. By ensuring that components meet strict performance and quality standards, Teradyne plays a mission-critical role in the manufacturing supply chain for consumer electronics, automotive, aerospace, and defense industries.

Beyond semiconductor test equipment, Teradyne has strategically expanded into the industrial automation market, particularly in robotics. Through acquisitions like Universal Robots, Mobile Industrial Robots (MiR), and AutoGuide, Teradyne has broadened its reach into collaborative robots (“cobots”), autonomous mobile robots, and other industrial automation technologies. These innovations are designed to make manufacturing more efficient, flexible, and safe, as they allow machines to operate alongside humans and handle repetitive or physically demanding tasks.

Where Do They Fit in the Supply Chain? 👉 Testing

Teradyne’s testing solutions primarily come into play during and after semiconductor fabrication. Chips are first manufactured on silicon wafers at a foundry, then undergo “wafer sort” testing to screen out defective dies. After packaging, finished chips move to “final test,” where Teradyne’s automated test equipment (ATE) checks functionality, speed, power consumption, and other critical parameters. This ensures that only high-yield, reliable components make it into end products—like smartphones, automotive control modules, and servers.

Within the broader supply chain, Teradyne sits between chip manufacturing and end-product assembly. Semiconductor companies and outsourced semiconductor assembly and test (OSAT) providers use Teradyne’s testers to validate that each chip meets exact specifications before shipment to device makers (e.g., Apple, Samsung, automotive OEMs). Teradyne’s system test and wireless test solutions apply similar validation steps for electronic subsystems—like storage drives or RF modules—giving manufacturers confidence in the performance of mission-critical components.

Major customers include top integrated device manufacturers (IDMs) like Intel, foundries such as TSMC, and OSAT firms including ASE and Amkor. In addition, consumer electronics giants and automotive suppliers rely on Teradyne equipment through their supply-chain partners. On the supplier side, Teradyne sources specialized electronics, instrumentation, and mechanical parts from component makers with expertise in sensors, printed circuit boards, precision machining, and software modules. These suppliers provide the building blocks that Teradyne integrates into its ATE and robotics platforms.

Product Suite 👉 Business Units

Semiconductor Test: Teradyne’s largest business, providing advanced test equipment for integrated circuits in devices such as smartphones, automobiles, and IoT gadgets. Its testers ensure chip quality, performance, and reliability.

System Test: Focused on testing electronic systems beyond semiconductors—covering storage devices, aerospace, and defense electronics. It ensures complex, mission-critical components meet rigorous industry standards.

Wireless Test: Offers solutions for testing wireless connectivity and radio frequency (RF) components. These systems help validate performance in mobile devices, networking equipment, and emerging 5G applications.

Industrial Automation: Encompasses robotics businesses like Universal Robots, Mobile Industrial Robots (MiR), and AutoGuide. Their collaborative and mobile robots streamline manufacturing, enhancing productivity and safety.

Key Driver 👉 AI Opportunity

AI is driving higher complexity and unit growth in some of the more test-intensive areas of the market – especially in Compute, Networking, and Memory (HBM).

Teradyne is a clear beneficiary, with underappreciated leverage to AI proliferation – benefiting from robust market growth, but also meaningful share gain opportunities. Teradyne has the majority of test share across networking solutions from Mellanox, Marvell, and Broadcom. They are also generally splitting share with Advantest for custom silicon, and are securing meaningful design wins at both levels of high bandwidth memory (HBM) test. Due to the interconnected nature of the semiconductor supply chain, a rising tide here lifts all ships.

Custom silicon is how Megacap tech companies are combating the pricing power of Nvidia. By pushing to build more of their own chips, they are able to optimize performance and be a little less reliant on the near-monopoly Nvidia currently possesses.

By The Numbers 👉 Key Metrics

When you look at the financials, at first glance there isn’t really much to write home about.

2022 and 2023 saw declining revenue. As mentioned, this is due to the highly cyclical nature of the core business. However, when we look into 2024 and through to 2025 and 2026, we see a notable acceleration in expected growth. This is all done on a highly free cash flow generative basis.

Further breaking down the outlook TAMs, there looks to be a solid move upwards of the overall market as goalposts continue to move on the compute and memory side as both the test and robotics division will experience strong growth.

Risks 👉 Potential Pitfalls

Slow Ramp at Key Vertically Integrated Customers: A concern is the potential for very slow growth—or even the loss—of business from large, vertically integrated customers, which could decide to develop or source in-house test capabilities.

Rising Competition from Chinese Provider Accotest: Another significant risk is the emergence of Accotest, a growing Chinese test equipment company challenging both Teradyne and its main competitor, Advantest. As China continues to invest heavily in its semiconductor ecosystem, Accotest could capture a larger share of domestic contracts, threatening Teradyne’s market presence and potentially compressing margins through increased price competition.

Cyclical Semiconductor Demand and Capital Spending: Finally, Teradyne’s core business remains sensitive to the semiconductor cycle. Any industry-wide slowdown, overcapacity, or delayed transition to next-generation chip technologies could result in lower capital expenditures by chipmakers and OSAT providers. That cyclicality, coupled with emerging geopolitical uncertainties, introduces volatility in Teradyne’s order flows and long-term growth trajectory.

Wrapping Up…

Teradyne’s stock has been somewhat muted due to cyclical pressures across Auto, Industrial, and Consumer. This has created an environment where Teradyne is actually trading at attractive valuation levels, especially considering the rest of the players in the AI space.

Into 2025, as these other markets find a bottom, look for AI-driven upside to shine.

For those looking for the best Week in Review and Investing Week Ahead posts on the web — click below to learn more about Rate of Return, the GRIT Flagship newsletter!

Cheers,

The GRIT Alpha Team

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