3 Reasons to Sell TER and 1 Stock to Buy Instead
Teradyne has gotten torched over the last six months - since December 2024, its stock price has dropped 28.6% to $90.51 per share. This might have investors contemplating their next move.
Is now the time to buy Teradyne, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Teradyne Not Exciting?
Even though the stock has become cheaper, we're swiping left on Teradyne for now. Here are three reasons why we avoid TER and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Teradyne’s 3% annualized revenue growth over the last five years was sluggish. This was below our standard 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.
Teradyne Quarterly Revenue 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 2.4%. While this projection implies its newer products and services will spur better top-line performance, it is still below average for the sector.
3. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Analyzing the trend in its profitability, Teradyne’s operating margin decreased by 7.9 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 21.9%.
Teradyne Trailing 12-Month Operating Margin (GAAP) Final Judgment
Teradyne isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 25.1× forward P/E (or $90.51 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
Story ContinuesStocks We Like More Than Teradyne
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