Teradyne's Cobot Opportunity More Than Just Hype

What makes Teradyne (TER) interesting is the combination of a high-share, margin-rich, cash-flow-generating semiconductor test business with an emerging growth story in collaborative robots (or "cobots"), a high-potential new segment of the robotics market where Teradyne has established a strong initial market share and a business plan and ecosystem that may make it harder for established robot players like Fanuc (OTCPK:FANUY), Yaskawa (OTCPK:YASKY), and ABB (ABB) to muscle Teradyne aside and replicate their traditional shares of the robotics market.

Although there will be some above-trend years and Teradyne is a net beneficiary of increasing chip content and complexity, I believe the core semiconductor test business is a solid but not spectacular business. The cobot business, though, has legitimately exciting potential and should be the key driver of what I expect to be high-single-digit long-term revenue growth and double-digit FCF growth over the next 10 years.

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Teradyne's Cobot Opportunity More Than Just Hype

Teradyne Should Redeploy Capital Toward Growth

Not all semiconductor equipment is the same, and while Teradyne (NYSE:TER) is essentially a co-duopolist with Advantest (NYSE:ATE) in the back-end semiconductor test space (and a pretty well-run company on balance), it's hard for me to see this market offering a lot of attractive long-term growth opportunities. It does tend to support solid margins and cash flows over the full cycle, though, and that gives Teradyne the resources to consider its long-term options.

As is, I think Teradyne is basically fully valued today. The "but" is that the company has a healthy balance sheet and the opportunity to buy its way into new growth markets. The company's early position in collaborative robotics is one such example, and there are a lot of places Teradyne could go in industrial automation from here. By the same token, the company could make complementary acquisitions to augment existing test businesses; these deals wouldn't likely be growth drivers, but could make sense from longer-term synergy and cash-on-cash return perspectives.

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Teradyne Should Redeploy Capital Toward Growth

Xcerra Waiting For The Next Elevator In The Testing Cycle

It has been a while since I've written about Xcerra (NASDAQ:XCRA), a small hyper-cyclical player in the semiconductor test market. When I last wrote about the company, I thought the shares looked undervalued below $12.50 in May of 2014. The shares did break into the $10s a few times after that, but the momentum in the system on a chip (or SoC) testing market faded faster than expected and Xcerra took an all-too-common cyclical tumble back into the mid single-digits.

The shares do appear undervalued again today, and the company is addressing new markets that meaningfully expand its total potential revenue opportunity. That said, Teradyne (NYSE:TER) and Advantest (NYSE:ATE) have commanding share in the industry and it's far from certain that Xcerra's new opportunities are going to work out as hoped. I can see the appeal here for risk-seeking investors who want to find a high-leverage play on increased semiconductor equipment spending, but I think this is definitely the sort of stock you "date" as opposed to making a long-term commitment.

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Xcerra Waiting For The Next Elevator In The Testing Cycle

Seeking Alpha: Super-Cyclical Xcerra Seems To Have More Left In The Tank

Semiconductor companies have enough cyclical volatility to frustrate most investors. Semiconductor equipment companies are even worse. Semiconductor test equipment is its own special corner of cyclical-hell, as peak-to-trough moves can easily exceed 66%. What goes down can go up again, though, and while Xcerra (XCRA) (LTXC) has more than doubled over the past year, momentum in the testing market and the stock's valuation suggests there could still be more gains in store.

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Super-Cyclical Xcerra Seems To Have More Left In The Tank

Investopedia: FormFactor Shaping Up

Outside of a few notable stories like KLA-Tencor (Nasdaq:KLAC) and FSI (Nasdaq:FSII), this hasn't been an especially good environment for companies selling equipment into the semiconductor space. While FormFactor (Nasdaq:FORM) has been nearly left for dead, there may at last be some reasons for hope in the company's memory probe card business.

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http://stocks.investopedia.com/stock-analysis/2012/FormFactor-Shaping-Up-FORM-CSCD-ATE-AEHR0504.aspx