Famed disruptive growth investor Cathie Wood, founder and CEO of Ark Invest, has made a name for herself as one of the most bullish voices on Wall Street. Despite this reputation, Wood and company dumped its holding in Nvidia early this year -- at exactly the wrong time. Nvidia has since provided a financial outlook that includes billions of extra artificial intelligence (AI) revenue in a single quarter.
Among other things, one Ark ETF, the ARK Autonomous Technology & Robotics ETF (ARKQ 2.52%), has been scooping up shares of Teradyne (TER 4.79%) instead. What is Teradyne, and is it really a buy?
Teradyne -- the robotics chip stock you've never heard of
Aside from its notoriety among a few Ark Invest fans, few investors have heard of Teradyne. That's because Teradyne is a behind-the-scenes equipment maker. Its bread and butter are machines used by semiconductor fabs (facilities that manufacture chips) to automate the testing of chips and computing systems.
Thus, the buzzword "robotics" is being applied to Teradyne as robots are simply a way to automate (read: speed up manufacturing time and simultaneously save money) industrial processes. Taiwan Semiconductor Manufacturing has been Teradyne's top customer in chip and computing system testing for years.
However, Teradyne's strength in chipmaking automation led it to acquire two other robotics companies: Universal Robots (or UR, a specialist in robotic arms used in manufacturing and assembly facilities, purchased in 2015) and Mobile Industrial Robots (MiR, a maker of mobile robots that can move materials and products around warehouses, purchased in 2018). In the first quarter of 2023, 86% of Teradyne's $618 million in revenue came from semiconductor and computing system test machines, with the remaining 14% of sales coming from UR and MiR.
Sounds cool, but there's a catch
Teradyne sounds like a great little AI and robotics stock for chips and industrial automation alike, but it's not all rosy. Like any manufacturing business, Teradyne can go through some nasty cyclical downturns.
That's exactly what is transpiring right now. Q1 2023 revenue was down 18% year over year. Wall Street analysts are calling for a mid-teens percentage revenue decrease for full-year 2023 across both chip test equipment and Teradyne's UR and MiR robotics segments. This jives with the broader semiconductor manufacturing equipment slump occurring at the moment due to lower chip sales and global macroeconomic weakness (fears of recession).
Why buy Teradyne now?
Given this issue, why in the world is Cathie Wood selling the soaring Nvidia and buying slumping Teradyne stock instead? Given all that transpired in the first half of 2023, this was clearly the wrong call.
Data by YCharts.
As an aside, this is why long-term investors shouldn't try to time buys and sells. Buy a quality business you believe has good prospects for many years, then forget it.
At any rate, it would seem Ark's bet is that Teradyne's robotics will be in high demand again eventually. After all, organizations around the world are looking for ways "to do more with less" after inflation and labor shortages have struck the last couple of years. With Nvidia hype at full force right now, perhaps Teradyne is a timely buy while most investors sleep on its opportunity.
But with business in a slump, Teradyne still isn't cheap. The stock currently trades for 30 times trailing-12-month earnings but nearly 40 times earnings based on Wall Street's full-year 2023 forecast (due to falling sales and profits).
However, the expectation is for bumper years in 2024 and 2025 with Teradyne revenue accelerating to an average 20% or better growth rate in the next two years. If analysts' consensus earnings per share prediction is remotely correct, Teradyne trades for about 17 times expected earnings per share in 2025. A rally in industrial robotics could occur, and a record number of new chip fab construction projects will begin coming online in 2025.
I wouldn't exactly call this a value. Remember, Teradyne is cyclical, so who knows what happens next after what is expected to be a new boom cycle following the 2023 downturn. But my bet is that's what has Ark Invest bullish on Teradyne.
As for me, I'm passing for now on this robotics and AI stock. I see a few semiconductor manufacturing companies trading on the cheap, and Teradyne isn't one of them.
