I wish I could say there was some sort of poetic intent in the fact that all three of these companies' names begin with "T," but I'd be lying. The reality is that Teradyne (TER 4.79%), Tesla (TSLA -1.11%), and Trimble (TRMB 1.59%) are long-term favorites of Cathie Wood, and her exchange-traded funds (ETFs) have bought more shares of all of them recently. That's my reason for looking at them now, and it's a good one because all three are highly attractive growth stocks with long-term earnings tailwinds.
Teradyne for its exposure to semiconductors
If you follow Wood into Teradyne, you will have to accept you are buying into a highly cyclical stock. That comes with investing in a company whose primary activity (accounting for around two-thirds of revenue in 2022) is designing, manufacturing, and selling semiconductor testing equipment. Taiwan Semiconductor Manufacturing and Qualcomm (two of the three largest semiconductor companies in the world) are significant customers of Teradyne.
Image source: Getty Images.
Its solutions help its customers improve production quality, performance, and yield while reducing the time to market for semiconductor devices. Its other business includes system tests (15% of 2022 revenue), robotics (13%) and wireless testing systems (6%).
These are all attractive end markets over the long term, not least as semiconductors become increasingly integrated into new products. As such, Teradyne will surely recover from the trough it experienced in 2023, which was caused by a slowdown in spending on consumer electronics. Indeed, Wall Street analysts forecast that Teradyne's revenue will grow by 11% in 2024 after a 15% slump in 2023.
That's fair enough, but it's still hard to argue that Teradyne is a value stock right now, even if it's at a cyclical low. For example, now that the lockdown-initiated boom in consumer electronics spending is over, Teradyne appears to have reverted to its long-term revenue trend line, with an annualized growth rate of around 6.5%, with a 10-year average free cash flow (FCF) conversion from sales of 19.4%.
TER Revenue (TTM) data by YCharts.
Taking this year's revenue estimate of $2.68 billion as a baseline and plugging in a 6.5% annualized growth rate and the 19.4% FCF conversion rate means it could be a decade before the company books $1 billion in FCF, which would give it a price-to-FCF ratio of 15 at the current share price. That seems like a long time to wait for a stock to look like a great value.
Tesla for more than just electric vehicles
The same argument could be made about Tesla, but there's a fundamental difference between them. Teradyne operates in highly competitive markets in an established market. By contrast, Tesla has a 50% share of the U.S. electric vehicle (EV) market and aims to be the leader in robotaxis.
Indeed, Ark Invest's "expected value" case for Tesla in 2027 is based on the assumption that two-thirds of the value of the company will lie in robotaxis compared to just 24% from EVs. For reference, Ark's expected value case forecasts that Tesla will be worth $2,000 a share that year compared to its "bear case" of $1,400 and its "bull case" of $2,500. Its current price is $239 per share.
Image source: Getty Images.
While Ark's model contains plenty of assumptions about the development of robotaxis, it illustrates the growth potential in a market leader building out and creating its own market. Tesla's ongoing success with EVs suggests it's hard to bet against Elon Musk.
Trimble for its growing recurring revenue
The positioning and workflow technology company is a highly attractive investment, not least because its market is undergoing an evolutionary change that will also be reflected in its improving operating metrics.
The company's origins lie in positioning hardware, but thanks to advanced analytics and software capability development, its offerings are becoming increasingly important to its customers' daily workflows. Instead of simply positioning customer assets, as in, say, transportation fleets or construction vehicles on a project, Trimble's software, data, and analytics capability is helping customers optimize outcomes.
Using Trimble's tech, farmers can make better operational decisions regarding their crops, trucking fleet routes can be optimized, and construction projects can be precisely monitored and planned to reduce waste and improve productivity.
Image source: Getty Images.
This shift toward analytics means that Trimble is growing its software sales and recurring revenue streams, which should result in higher profit margins and, ultimately, larger profits and cash flow. While 2023 proved to be a challenging year, Trimble continues to grow its annualized recurring revenue (ARR) at a mid-teens percentage rate, and that's likely to result in significantly improved free cash flow generation in the coming years.
Stocks to buy?
Of these three stocks, Trimble looks the best value, while Teradyne probably would need to dip a bit before it would look like a good value. Tesla will suit those looking for significant upside potential from a blue-sky growth opportunity in robotaxis and expanding profitability in its EVs.
