#24 - New Position: Teradyne ($TER)

Author

Graham Schroeder
September 20, 2024

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This week, we dive into the first Fed rate cut in four years, FDA device and testing news, and why I just started a position in Teradyne ($TER), a diverse manufacturing automation equipment company in the public Freedom Fund brokerage.

Market Recap

  • Neuralink Obtains FDA Breakthrough Device Tag for 'Blindsight' Implant

    • Elon Musk's brain-chip startup, received the FDA's "breakthrough device" designation aimed to accelerate the development and review of medical devices that provide treatment for life-threatening conditions. Blindsight aims to restore vision, even for those who have lost both eyes and their optic nerve.

    • Blindsight involves a chip that processes and transmits neural signals, which can be relayed to devices like computers or phones. Neuralink is also testing an implant designed to enable paralyzed patients to control digital devices through thought alone.

    • The company has also begun enrolling patients in trials to evaluate its other brain implants designed to assist paralyzed individuals.

  • Fed Slashes Interest Rates For first time in 4 Years

    • Federal Reserve cut interest rates by half a percentage point, marking the first rate reduction since the early days of the COVID-19. The move brought the federal funds rate down to a range of 4.75% to 5%.

    • Despite steady GDP growth and an inflation rate around 2.5%, the Fed expressed concerns about the labor market's softening. The decision was supported by most committee members, with a projected further reduction of rates by 50 basis points by the end of the year.

    • The cut led to volatility in the stock market, with the Dow Jones Industrial Average experiencing fluctuations as investors processed the news.

  • Blood Battle: High-Stakes Race for Cancer Detection

    • Guardant Health ($GH) and Exact Sciences ($EXAS) are competing in the blood test market for colorectal cancer detection. Guardant's Shield test recently became the first blood test approved by the FDA as a primary screening option for colorectal cancer, while Exact Sciences reported positive results from a study on its blood-based test.

    • Exact Sciences' test showed strong results in detecting cancers and precancerous polyps, outperforming competitors in early trials. The study was relatively small, and larger trials are needed to confirm the results and secure FDA approval.

    • The market for colorectal cancer screening is massive as there is around 60 million unscreened Americans. The most accurate test could have a substantial competitive advantage.

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Freedom Fund Portfolio

Freedom Fund Background: I created the Freedom Fund as a public brokerage account back in October of 2022 to share that anyone with a social security # and a bank account can begin their investing journey by investing a couple hundred dollars a week. Every week and month I post on X (@GrahamInvesting) public updates about the purchases, exits, dividends, and growth of the fund if you want to follow in real time. The biggest obstacle people have to investing is just getting started so I decided to start a new account at $0 to start from nothing with you.

New Position - Teradyne, Inc.

For months now I have been wanting to add a robotics type position to my portfolio. After doing a deep dive this week I will break down why I decided to add Teradyne, Inc ($TER) to the Freedom Fund. Teradyne has been around for 64 years, and they may now be at the forefront of the automation revolution. The stock price has performed well in 2024, showing a year-to-date increase of ~20%. The stock experienced a strong run over the past year, with a notable ~37% rise. Below is a breakdown of the company and its future potential:

  • Financials

    • Teradyne holds a market value of approximately $15-20 billion. Over $3 billion in annual revenue with a 5-year CAGR of 8-10% showing it has some strong revenue growth potential.

    • Their gross profit margin of 55-60% and net margin of 20-25% is strong on the books.

    • Currently generating ~$500 million annual free cash flow. Holds a low debt-to-equity ratio with cash reserves of $1-2 billion.

  • Revenue Streams

    • Currently their semiconductor testing accounts for 65-70% of revenue. 15-20% of revenue comes from collaborative robots (cobots) through Universal Robots (a company they acquired in 2015.

    • Holds a global presence across North America, Asia-Pacific, and Europe. Serving semiconductor manufacturers, electronics, automotive, and industrial firms.

  • Growth Potential

    • With 5G and semiconductor demand they provide testing solutions for next-gen technology.

    • Currently leading the collaborative robot market with a CAGR of over 20%. And are allocating around 15% of revenue into R&D in testing and robotics.

    • Diversification through acquisitions into companies like Universal Robots, Mobile Industrial Robots, Energrid, AutoGuide Mobile Robots, and Technoprobe. Look for $TER to seek out opportunities in new industries like construction and logistics. Back in March they announced a partnership with NVIDIA to bring new AI capabilities to automation applications.

  • Market Position & Strategy

    • They are a global leader in semiconductor and wireless product testing solutions.

    • Pioneer in the cobot robotics market through Universal Robots.

    • Operate with a high margin with premium pricing due to advanced technology and reliability.

    • Long-standing relationships with major semiconductor and electronics companies.

  • Potential Investment Risks

    • One risk for Teradyne is the cyclical nature of the semiconductor industry, which can affect demand for testing equipment. Teradyne mitigates this risk through diversification into industrial automation and by maintaining a strong pipeline of products tailored to the latest semiconductor technologies.

    • There is strong competition in both the testing and robotics markets. Teradyne’s focus on innovation and maintaining a technological edge allows it to command a premium in pricing and retain market share.

    • Potential AI bubble at play can always be a large risk with investments in such markets.

Teradyne's combination of financials, market position, and strategic focus on growth markets like 5G, semiconductors, and automation makes it an appealing long term hold to me. It has high margins and great cash flow to provide it with the resources to continue growing and diversifying into new markets. With Teradyne’s current debt profile and the trending adoption of automation and robotics I see Teradyne positioning itself well into the future.

The purpose of this newsletter is to encourage you and our other 77 Gazette subscribers to start and stay consistent with your personal, professional, and financial journey.

Thanks for investing your time reading this.

Disclaimer: Graham’s Gazette provides information and resources related to investing, financial topics, and personal growth for educational and entertainment purposes only. The content presented is not intended to be construed as financial advice. Readers are encouraged to conduct their own research and consult with qualified professionals before making any financial decisions. Graham’s Gazette and its creators do not assume any responsibility for the accuracy or completeness of the information provided nor do they guarantee any specific results from such use of information.