Teradyne Tests Investors When Chips Fall
Teradyne Inc. is the world’s biggest maker of semiconductor-testing equipment, but it’s Teradyne’s investors who are going through the wringer lately.
The Boston-based company, whose largest plant is in Agoura Hills in the Conejo Valley, had enjoyed a surging stock price until early May. That’s when the stock suddenly plummeted after some analysts wondered aloud whether Teradyne’s red-hot growth rates in sales and order bookings the last two years might be slowing--and whether it would be just temporary.
Two weeks later, those fears ebbed and investors pounced on Teradyne’s stock as a bargain, sending the shares soaring yet again. But then the stock went into yet another tailspin.
Even by the normally wild gyrations of semiconductor-related shares, Teradyne’s recent swings have raised eyebrows, though the stock has still more than doubled in price during the last 12 months. The stock closed unchanged Friday at $81 a share in composite trading on the New York Stock Exchange.
More important, is Teradyne’s hot streak peaking? That’s always a big question in the chip industry, which is notorious for its up-and-down cycles. But in Teradyne’s case, it’s not an easy question to answer because by their nature the order rates for semiconductor-testing gear--even in generally strong times--fluctuate during the year, analysts said.
“It’s difficult to tell right now because roughly 70% of their orders come in the last month of the quarter,” said Eric Ross, an analyst at investment firm Thomas Weisel Partners in San Francisco.
But overall, the company’s “fundamentals look great,” he said, and other analysts agreed that Teradyne’s outlook remains robust for at least the next year or two.
“When the stock got down to $67 [in late May], I got as many clients into it as possible,” Ross said. There will be some seasonal slowdown in order growth this summer, but “you’re looking to strong growth again in the fourth quarter and in the first half of 2001,” he said.
He won’t get an argument from George Chamillard, the company’s chief executive and a 30-year Teradyne veteran who this month also became chairman when he succeeded the company’s founder, Alex d’Arbeloff.
“If you focus on one quarter’s bookings, you’ll drive yourself crazy, and that’s not the way we run this company,” Chamillard said in an interview. In general, Teradyne is enjoying the fruits of “the insatiable bandwidth desire that people need,” meaning their desire for ever-increasing performance and versatility in semiconductors--chips that also need to be tested, of course.
Teradyne mainly produces equipment that tests the quality and reliability of various semiconductors that are used in dozens of products, including computers, wireless phones, networking gear and consumer electronics, such as hand-held computers and DVD players.
Indeed, Motorola Inc. is Teradyne’s biggest customer, accounting for 11% of its $1.79 billion of revenue last year, and its other major clients include chip makers such as Texas Instruments Inc.
Teradyne also makes systems for testing circuit boards, and it builds “backplane connection systems,” or the assembly into which the circuit boards are inserted to connect all of the product’s electronic guts. Overall, Teradyne sells about 52% of its equipment to foreign customers.
The company has about 7,500 employees, 1,450 of which work at the Agoura Hills plant. That site, which includes its own foundry, makes equipment for testing memory and logic chips that end up in personal computers, higher-end computer workstations, automobiles and video game players, among other products.
Steven Pelayo of Morgan Stanley Dean Witter was one of the analysts whose comments in May helped send the stock lower. But Pelayo said that his remarks were misinterpreted and that investors overreacted. He said he was reiterating Teradyne management’s own guidance that its second-quarter orders would be flat compared with the company’s huge gains in the first quarter.
“Those kind of sequential growth rates are not sustainable,” Pelayo said. “But people assumed I was calling the [growth] cycle over and that Teradyne was over. That’s not the case.” Indeed, he added that “I think its September bookings are going to accelerate.”
Demand for semiconductors naturally drives demand for testing gear, and the outlook for chip sales also is mixed. Sales are expected to keep growing at a double-digit clip for the next two years--but that rapid growth rate will be slowing, the Semiconductor Industry Assn. said recently. The trade group sees global sales jumping 31% this year, then 25% in 2001 and only 14% the following year.
One thing is for sure: Teradyne’s orders in this year’s first quarter, $1.02 billion, stunned Wall Street. Not only did they dwarf the company’s $444 million worth of orders a year earlier, they also easily topped analysts’ expectations of about $775 million.
They were “off-the-chart bookings,” as analyst Mark FitzGerald of Merrill Lynch & Co. put it.
And that’s partly why investors sold off the stock, because they figured Teradyne would never be able to match or exceed those orders, analysts said. “If the last quarter had not been so dramatically up . . . you would not have this concern,” said analyst Susan Billat of Robertson Stephens in Palo Alto.
“But we don’t think this signals either a shift in [Teradyne’s] dominance,” she said, “or the end of the [growth] cycle.”
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A Wild Ride
The stock of microchip equipment maker Teradyne has more than doubled in the last 12 months. But since May, shares have gyrated as analysts wonder if the hot streak is cooling.
Weekly closes and latest: Friday: $81.00
Source: Bloomberg News
