Is This Cathie Wood Chip Stock a Buy Right Now?

Semiconductor test equipment and robotics maker Teradyne (TER 4.79%) is currently the fourth largest holding in Cathie Wood's ARK Autonomous Technology & Robotics ETF (ARKQ 2.52%). Wood and team also increased their stake in the flagship ARK Innovation ETF (ARKK 1.05%) ahead of Teradyne's earnings. https://cathiesark.com/arkk-holdings-of-ter 

Despite an ugly downturn for the chip industry, Teradyne reported slightly better-than-expected results for second-quarter 2023. Is this equipment company stock a buy?

Part semiconductor testing, part industrial robots business

The bulk of Teradyne's business is making machines that test semiconductors and computing systems for integrity before getting sold. This equipment has a wide range of applications, from actual chip fabs (the plants that make semiconductors) to subcontractors that assemble chips for use in everything from autos to wireless networks. 

Teradyne also has a small robotics segment, via its acquisition of Universal Robots in 2015 and Mobile Industrial Robots in 2018. Together, this small unit addresses everything from robotic arms used in manufacturing to autonomous bots used in moving things within warehouses.

Computing system complexity is only going up, and industrial and manufacturing companies are showing increasing interest in robotics to manage labor shortages. Teradyne's upside over the next decade is thus fairly clear. But the company is still in the midst of a year-over-year (YoY) cyclical downturn, on display in the Q2 2023 numbers. The positive is that it appears Teradyne hit bottom in first-quarter 2023, and revenue in its testing segments is now beginning to rally on a quarter-over-quarter (QoQ) basis.

Data source: Teradyne.

Falling behind in robotics?

Teradyne's Q2 results were overall better than Wall Street analysts were expecting, and the company remains profitable even in the midst of the current semiconductor slump as its customers focus on cost-cutting in 2023. 

But what about that robotics segment? Sales are weakening again on all fronts, despite some other robotics companies reporting strengthening financials. Small start-up Symbotic (SYM 1.62%) -- which specializes in warehouse and supply chain bots -- just reported a 77% year-over-year increase in sales to $312 million during its quarter that ended in June 2023.  

Teradyne CEO Gregory Smith admitted some shortcomings on the last earnings call:

We are in Robotics for growth, and we're not delivering the growth that we expected to from this business. And what we're really discovering is that there's a -- if I'm going to sort of sum it up, we misunderstood how large the potential end market is. And how much the early years of those businesses was driven by very sophisticated early adopters, people that were like robot enthusiasts. And what we found is that as we satisfied those early enthusiasts and started moving into a larger market where people were more focused on just buying a solution that they didn't have the skills that they needed to put these robots into operation. 

In other words, Teradyne's robotics segment is shuffling things around to help interested potential customers that don't have the tech know-how to implement robotics solutions on their own. This reorganization is going to take time, though, and Teradyne robotics is likely to finish 2023 with sales down from 2022 and perhaps reporting an operating loss.

Time to buy?

Even though Ark Invest owns Teradyne stock, I'm still not so sure about this one. It's promising that the semiconductor and computing systems businesses are showing signs of life again, but financial results are still far off from their peaks in 2022. Meanwhile, robotics are promising, but Teradyne isn't delivering. 

The stock currently trades for nearly 34 times trailing 12-month earnings per share (or 40 times free cash flow), and about 25 times next year's (2024) expected earnings. In other words, this isn't a deal. If a semiconductor equipment company is what you're looking for, I think there are better buys out there at the moment.