Teradyne has been on fire lately. In the past six months alone, the company’s stock price has rocketed 70.4%, reaching $374.00 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Teradyne, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Teradyne Not Exciting?
We’re happy investors have made money, but we don’t have much confidence in Teradyne. Here are three reasons why TER doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Teradyne grew its sales at a mediocre 3.4% compounded annual growth rate. This fell short of our benchmark for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Teradyne’s revenue to rise by 17.7%, a slight deceleration versus its 3.4% annualized growth for the past five years. This projection is underwhelming and implies its products and services will see some demand headwinds.
3. Free Cash Flow Margin Dropping
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Teradyne’s margin dropped by 10.7 percentage points over the last five years. This along with its unexciting margin puts the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. Teradyne’s free cash flow margin for the trailing 12 months was 14.6%.
Final Judgment
Teradyne isn’t a terrible business, but it doesn’t pass our quality test. Following the recent rally, the stock trades at 62.8× forward P/E (or $374.00 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We’re fairly confident there are better stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.
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