Teradyne

Teradyne's strong second-quarter results came in well above guidance and it raised its guidance for the second half of 2026. Sales rose 104% year over year to $1.33 billion. The implied 2026 full-year revenue guide came up more than 10% from last quarter, now implying 60% growth at the midpoint.

Why it matters: Teradyne's expanding its penetration in compute chip testing for artificial intelligence should generate massive growth for the next few years. Building on existing strength in Google's TPU, it has qualified as a second source in Nvidia's GPU testing and benefits from Arm CPUs gaining share. AI accounts for the majority of total revenue, and compute chips are the majority of total chip testing sales. Teradyne had been on the outside of AI chip testing, with rival Advantest owning sole share with Nvidia and AMD, but now looks primed to take back share. We believe underlying AI investment growth, along with share gains at compute customers, should power immense growth through at least 2028. Teradyne qualified in another hyperscaler's custom chip program this quarter, and we believe further share gains in compute are on the horizon.

The bottom line: We raise our fair value estimate for wide-moat Teradyne to $350 per share, from $275, behind a higher compute testing growth forecast. Shares are down more than 30% in the last month in an AI tech bear market and now look fairly valued to us. We expect massive growth for chip equipment through 2028, rising by 20% to 30% annually over the next three years. This underpins our growth forecast for Teradyne and is augmented by share gains. For Teradyne, we model nearly 40% annualized chip test growth through 2028. Accelerating AI-led growth brings our model quickly above Teradyne's long-term targets as given in January 2026. We model Teradyne blowing past these time-agnostic targets of $6 billion in revenue and $11.00 in non-GAAP EPS in 2027.

Specifically, we typically see the chip testing market holding steady at about 8% of the size of the wafer fabrication equipment, or WFE, market. Our current expectations for WFE are in the ballpark of $150 billion in 2026, implying a testing market of $12 billion. Our 2026 chip testing forecast for Teradyne ($4.4 billion) then implies about a 36% share. In 2027, we expect WFE to trend toward $190 billion (27% growth) and bring chip testing to a market size of $15.2 billion. Our 2027 Teradyne chip testing forecast ($5.7 billion) implies a 38% share. We expect another year of 20% market growth in 2028, leading Teradyne's chip testing revenue close to $7 billion.

As it relates to the firm's target model from January 2026, Teradyne chose time-agnostic targets based on a chip testing market between $12 billion and $14 billion. At these levels, the firm expected $6 billion in total revenue and between $9.50 and $11.00 in non-GAAP EPS. While time-agnostic officially, this model was loosely based on 2028 as a timeline. We expect the market to hit the low end of this range in 2026 already and well exceed the high end in 2027. This brings our estimates for Teradyne in 2027 well above all of its long-term targets. Simply put, AI investments have accelerated, and Teradyne's share gains in compute testing benefit its path toward, and past, these targets.

Our valuation implies valuing Teradyne at roughly 22 times 2028 earnings, which we think is a fair multiple. After 2028, we expect growth to taper but remain healthy. There's certainly upside risk to our valuation. If Teradyne gains share (toward its aspirational goal of 30%) more quickly in Nvidia (about a $3 billion total opportunity this year), or broader compute chip testing demand rises more quickly, we'd expect even higher growth than the 40% clip we model through the next three years. Additionally, Teradyne has historically traded closer to the mid-20 to high-20 range in terms of a price/earnings multiple, which could provide further share price upside in the market. That being said, investors should also be wary of downside risk to the massive AI growth expectations baked into the firm's current valuation. Any slowdown or correction in AI spending broadly could have drastic downside implications for Teradyne's growth.

Our fair value estimate of $350 per share implies a 2026 adjusted price/earnings ratio of 37 times and a 2026 enterprise value/sales ratio of 10 times. Against our estimate of 2027 and 2028 earnings, we estimate a price/earnings multiple of 27 times and 22 times respectively, which fit Teradyne’s historical levels.

We project 25% compound annual sales growth for Teradyne through 2030, driven primarily by strong AI demand. We expect the largest contributor to overall sales growth to be the semiconductor test segment, and in particular the compute portion of this segment.

We expect stronger growth in 2026 and 2027, with 63% and 28% revenue growth, respectively. This is driven largely by steep investments in new chip capacity to service soaring AI demand. Across these two years, we expect Teradyne to raise its share as a second source for merchant GPUs from the likes of Nvidia, which it has thus far not served. We also expect rising custom AI chip volumes from the likes of Broadcom to benefit Teradyne as it holds good share in these customers. HBM demand and supply are rising quickly to fulfill AI demand, and we expect this to benefit Teradyne’s memory shipments. AI demand should also benefit Teradyne’s mobile and power chip testing as phones require more advanced chips to run on-device AI models, and power chip supply rises to fulfill AI infrastructure requirements.

Our growth over the next two and five years is driven primarily by compute testing revenue from existing customers like Broadcom and onboarding into Nvidia and AMD as a secondary source to Advantest. We expect more modest, market-level growth in mobile chips and automotive and industrial chips.

We expect the minority robotics segment to rise 20% annually over the next five years as the addressable markets for collaborative and autonomous robots see strong growth and penetrate new applications in factories. This segment remains a niche, sub-10% mix in our model, but supplements strong chip testing growth.

We think non-GAAP gross margins will maintain a level close to 60%. We think Teradyne will keep up strong organic investment in terms of operating expenses, especially from investing to scale its robotics businesses. Still, we expect operating leverage against immense volume growth, and as robotics become more profitable. Teradyne targets growing operating expenses at half the rate of revenue, and we expect it to achieve that going forward. Overall, we forecast non-GAAP operating margins to reach the mid-30% range in the next two years.

Our model anticipates Teradyne exceeding its long-term target model as soon as 2027. Teradyne’s model is time-agnostic, but centers around a semiconductor testing TAM of $12 billion to $14 billion. At this level, Teradyne expects $6 billion in revenue and $9.50 to $11.00 in non-GAAP EPS. We see Teradyne’s revenues surpassing its $6 billion target in 2027, and our 2027 EPS estimate comes in above the high end of this range, at about $13.00. Simply put, we see the TAM rising rapidly and much faster than management foresaw when it introduced the model, led by massive AI infrastructure investments and Teradyne’s share gains in the compute market.

We assign Teradyne a Morningstar economic moat rating of wide, based on a combination of intangible assets in semiconductor automated test equipment and switching costs created at chipmaking customers. We think Teradyne’s proficiency, which has led to a leading market share in ATE, will enable the firm to earn impressive returns on invested capital that will continue for the next 20 years.

Teradyne provides testing equipment for semiconductors, wireless products, and storage and avionics systems, as well as robotics equipment for industrial automation. Teradyne’s automated test equipment for semiconductors drives our wide moat rating, and we observe similar competitive dynamics at wide-moat-rated wafer fabrication equipment leaders under our coverage. Teradyne’s test equipment is highly capital-intensive and serves a relatively concentrated number of chipmaking customers.

In our opinion, Teradyne’s ability to design testing equipment for bleeding-edge chips is the biggest driver of its competitive advantage, representing intangible assets that we don’t think are easily replicable. Teradyne provides testing solutions for nearly every semiconductor on the planet during production, at both the wafer and final device package levels. Teradyne offers testers specialized for processors, microcontrollers, sensors, memory, and analog chips, with the value proposition being the ability to test multiple devices reliably in parallel. Wafers or packaged chips are run through a testing machine to ensure the final product meets all design specifications and to detect potential defects. Chips and wafers are typically tested at multiple temperatures, and Teradyne’s machines can pinpoint the specific manufacturing step that caused a defect. Building cutting-edge testing machines requires significant engineering effort across ASIC design, software development, and mechanical engineering—as well as substantial monetary investment. Furthermore, as chips become more advanced, with increasing transistor counts, smaller geometries, and new architectures like 3D NAND in memory and GAA transistors, testing grows more complex. With reducing time-to-market the top priority for chipmakers, Teradyne generates revenue by bringing new testers to market that validate newer chips more quickly.

Teradyne and its largest competitor, Advantest, are the only suppliers able to support the latest process technologies across a broad range of products and are best at reducing customers’ time-to-market. The ATE market is a practical duopoly between Teradyne and Advantest, which together hold more than 80% of the market, by our estimation, with Cohu as a clear-cut but distant tertiary player. Teradyne and Advantest are broad-reaching generalists distinguished primarily by their customer relationships and leadership for certain product types. For example, Teradyne has Apple as a marquee customer and is particularly strong in NAND memory testing, while Advantest has a strong relationship with Nvidia and has historically been strong in DRAM testing. Beyond Advantest, we don’t think any player can match the depth or breadth of Teradyne’s capabilities across semiconductor testing, providing market-leading equipment for the most cutting-edge chips across numerous chipmakers and product categories (digital, analog, memory).

In our view, Teradyne holds a durable position at the cutting edge of automated chip testing, driven by a substantial research and development budget that has enabled its leading market share. Teradyne can allocate a substantial development budget across multiple capital-intensive business lines, enabling it to serve chipmakers worldwide with testing equipment for a wide range of cutting-edge products. While we expect Teradyne and Advantest to continue competing at the top of the market, we think the sheer size of the investment both firms can make in developing new equipment is a significant barrier for upstart competitors.

We contend that Teradyne’s equipment also elicits switching costs for customers. We view Teradyne’s installed base of expensive equipment across customers as sticky, especially given the software the firm layers on top of its hardware; customers become accustomed to its Teradyne machine interface and integrate it into their workflows. In our opinion, a customer would be averse to switching to a new brand of tester due to the cost and integration time required for the transition. Beyond installation, it takes a customer time to develop new testing programs, ramp up use of a new machine, and integrate it fully into its back-end workflow. If a customer switched test suppliers, it would have to teach its engineers entirely new intricacies of the hardware configuration and software interface, as well as face the opportunity cost of lost productivity and slower time to market with a less familiar staff in the first year or two.

Teradyne’s competitive advantage in ATE—driven by leading capabilities, robust investment, and sticky customer relationships—exhibits itself clearly in the firm’s profitability and returns on invested capital and is evidence of a wide economic moat, in our view. Furthermore, Teradyne’s profitability leads the industry, with gross margins consistently above Advantest’s and materially higher GAAP operating profitability. We think its structural competitive advantages and excellent profitability resulting from strong execution will combine to drive market leadership and an enduring economic moat over the long term.

We think Teradyne’s depth, breadth, and steep investment in chip testing capabilities form structural competitive advantages that would be extremely difficult to replicate.

Secular trends toward greater chip complexity, capacity expansion, and onshoring should be durable demand drivers for Teradyne, and we expect AI to accelerate these drivers.

We think Teradyne’s robotics segment can augment top line growth and offset some semiconductor cyclicality longer term.

We expect continued head-to-head competition with Advantest to be a headwind to Teradyne’s growth and profitability, particularly with Advantest holding a superior position in GPU testing.

Teradyne’s historical concentration with Apple in the mobile phone market and low exposure to other high-growth customers like Nvidia gives it an uphill climb to share in attractive AI growth going forward.

We are skeptical of the fit of the robotics segment into the business; management may be chasing growth that isn’t aligned with its core competencies.