Artificial intelligence (AI) is all the rage right now, thanks to the viral hit ChatGPT, which Microsoft just made a big bet on. But the concept AI embodies -- automation -- is far from new.
In the wake of the Great Recession of 2008-2009, Teradyne (TER -1.76%) emerged as a growth stock. It sells a very different type of "AI" -- physical robots that can automate the testing and manufacturing of electronics and other mass-manufactured products.
According to many reports, robotic sales hit new records in 2022, and are poised to remain a top growth market the rest of this decade. But Teradyne has reported some glitches in its system lately. As a consequence, the stock is down 38% from its all-time highs reached in late 2021.
With that said, does this decline provide an ideal opportunity to buy this top robotics stock for 2023?
Expect long-term growth with robotics
According to the Association for Advancing Automation, sales of robots -- primarily in factories -- tallied up to over 44,000 in North America alone in 2022, an 11% year-over-year increase and a new record. This doesn't include sales to Asia, where a large chunk of the world's production of electronic parts takes place. Some analysts say that this market will continue to grow at a double-digit percentage over the next decade as manufacturing automation grows in importance and the capabilities of "collaborative robots" improve.
What do these robots do, exactly? Think of those robotic arms in factories doing highly repetitive tasks like painting or packaging products, or a mobile robot rolling around the floor of an e-commerce order fulfillment warehouse.
This movement isn't just a boon for Teradyne. Other top robot makers include Europe's ABB and Japan's Denso, both of which are leaders in the space.
By comparison, Teradyne's Universal Robots (purchased in 2015) and Mobile Industrial Robots (or MiR, purchased in 2018) are quite small. Teradyne's "industrial automation" segment hauled in just $403 million in revenue in 2022, although that was a 7% year-over-year increase (or a 15% increase excluding the effects of a strong U.S. dollar on currency exchange rates).
The bulk of Teradyne's $3.16 billion in total sales in 2022 comes from a different kind of robotics: Testing equipment for the semiconductor and electronics industry. This test equipment is used by semiconductor manufacturers to check quality and reliability at every level of the manufacturing process, from the chips themselves to a finished computing system. Teradyne's systems are used in a wide range of electronics, from smartphones to cars to the aerospace and defense sector.
What's eating Teradyne stock?
The problem is that during the second half of 2022, sales started to lose momentum. This was the case for the semiconductor test equipment, given that the industry has been in a slump that's expected to last into the first half of 2023. But the industrial robots segment lost steam too. Worries over recession, induced by the U.S. Federal Reserve's record interest rate hikes, are keeping a lid on demand for automation -- at least for now.
Revenue fell 15% in full-year 2022, and earnings per share (EPS) fell 24%, ending a solid six-year run of consistent growth for the robotic automation company. The trend is expected to continue into first-quarter 2023, with revenue forecasted (at the midpoint of guidance) to be down 22% from a year ago, and EPS to be down 59%.
Will Teradyne bounce back?
The good news here is that Teradyne remains highly profitable, even in a downturn, as its industrial customers manage expenses during a period of heightened economic uncertainty. An excellent balance sheet with $894 million in cash and short-term investments and another $111 million in long-term investments, offset by debt of just $50 million, is a plus.
Management has also been using the current downdraft in stock price to return lots of cash to shareholders via stock repurchases -- to the tune of $752 million last year alone. A dividend payment currently yielding 0.4% a year is a very small bonus, but the payout has been growing since the dividend was initiated in 2014.
Shares currently trade for 34 times one-year forward expected EPS. It looks like a premium, but this valuation assumes some steep declines in earnings in the next couple of quarters as Teradyne manages the present downturn in its various automation equipment. I'm exercising some patience here before I consider making a purchase, but I believe industrial robots will remain a top growth trend in the coming decade as manufacturers of all sorts (chips, autos, pharmaceuticals, etc.) look for novel ways to manage their expenses and boost profitability. Teradyne is certainly worth keeping on your watchlist if you think so too.
