Deutsche Bank: The Teradyne Rally Is Ending

Teradyne, Inc. TER, a supplier of automation equipment for test and industrial applications, has seen its stock soar more than 70 percent since 2017 began, prompting at least one investor to call an end to the rally.

The Analyst

Deutsche Bank's Sidney Ho downgraded Teradyne's stock rating from Buy to Hold with an unchanged $44 price target.

The Thesis

Teradyne's stock rose throughout 2017 as the company showed "solid progress" in its semi test and robotics businesses, along with impressive results in the SoC (system-on-chip) business, which grew 20 percent, Ho said in the downgrade note. But investors may be overlooking the fact that some of the SoC test share gains throughout 2017 will likely reverse in 2018 and impact the company's revenue growth profile, Ho said. 

The SoC business outpaced the underlying market — which grew at around 8 percent in 2017 — as the segment benefited from a "temporary mix shift toward areas where Teradyne's position is strong," the analyst said.

Deutsche Bank projects the segment will see a "normalization process" in 2018 and result in a $120 million revenue headwind next year. Even if the other areas, such as robotics, generate a 50 percent revenue growth rate to $100 million, the company's overall revenue in 2018 will grow just 2 percent to $2.14 billion and fall short of the Street's 4 percent growth estimates, Ho said. 

Investors aren't fully considering the impact for share loss in the SoC business, which implies the stock is trading at a "fair" valuation, the analyst said. 

Price Action

Shares of Teradyne were trading lower by around 0.75 percent Tuesday morning.

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