Teradyne (TER)

Semiconductor testing company Teradyne (NASDAQ:TER) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 4.3% year on year to $769.2 million. On top of that, next quarter’s revenue guidance ($960 million at the midpoint) was surprisingly good and 17.1% above what analysts were expecting. Its non-GAAP profit of $0.85 per share was 7.4% above analysts’ consensus estimates.

Company Overview

Sporting most major chip manufacturers as its customers, Teradyne (NASDAQ:TER) is a US-based supplier of automated test equipment for semiconductors as well as other technologies and devices.

Competitors in automated testing equipment include Advantest Corporation (TSE:6857), Cohu (NASDAQ:COHU), Keysight Technologies (NYSE:KEYS), and Rohde & Schwarz.

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Teradyne’s demand was weak and its revenue declined by 1.1% per year. This was below our standards and is a rough starting point for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. Teradyne’s annualized revenue growth of 2.2% over the last two years is above its five-year trend, suggesting some bright spots.

This quarter, Teradyne reported modest year-on-year revenue growth of 4.3% but beat Wall Street’s estimates by 3.3%. Adding to the positive news, Teradyne’s growth inflected positively this quarter, news that will likely give some shareholders hope. Company management is currently guiding for a 27.5% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 19.1% over the next 12 months, an improvement versus the last two years. This projection is healthy and suggests its newer products and services will fuel better top-line performance.

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Teradyne’s DIO came in at 104, which is 15 days above its five-year average. These numbers suggest that despite the recent decrease, the company’s inventory levels are higher than what we’ve seen in the past.

Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.

Teradyne’s gross margin is one of the best in the semiconductor sector, and its strong pricing power is a direct result of its differentiated products and technological expertise. As you can see below, it averaged an elite 58.4% gross margin over the last two years. Said differently, roughly $58.35 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

This quarter, Teradyne’s gross profit margin was 58.4%, down 1.3 percentage points year on year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Teradyne has managed its cost base well over the last two years. It demonstrated solid profitability for a semiconductor business, producing an average operating margin of 19.2%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Teradyne’s operating margin decreased by 15.1 percentage points over the last five years. Even though its historical margin was healthy, shareholders will want to see Teradyne become more profitable in the future.

This quarter, Teradyne generated an operating margin profit margin of 18.9%, down 1.7 percentage points year on year. Since Teradyne’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Teradyne, its EPS declined by 6.6% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

Diving into the nuances of Teradyne’s earnings can give us a better understanding of its performance. As we mentioned earlier, Teradyne’s operating margin declined by 15.1 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q3, Teradyne reported adjusted EPS of $0.85, down from $0.90 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 7.4%. Over the next 12 months, Wall Street expects Teradyne’s full-year EPS of $3.12 to grow 41.9%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Teradyne has shown mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 16.3%, subpar for a semiconductor business.

Taking a step back, we can see that Teradyne’s margin dropped by 8.8 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s in the middle of a big investment cycle.

Teradyne broke even from a free cash flow perspective in Q3. The company’s cash profitability regressed as it was 15.2 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Teradyne hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 36.8%, impressive for a semiconductor business.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Teradyne is a profitable, well-capitalized company with $297.7 million of cash and $268.8 million of debt on its balance sheet. This $28.97 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Teradyne blew past analysts’ adjusted operating income expectations this quarter. We were also glad its revenue and EPS guidance for next quarter both easily trumped Wall Street’s estimates. Zooming out, we think this was a very solid print. The stock traded up 18.8% to $171.40 immediately after reporting.

Updated: December 4, 2025 at 9:29 PM EST

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Teradyne, you should also grasp the company’s longer-term business quality and valuation.

Teradyne has a few positive attributes, but it doesn’t top our wishlist. Although its revenue has declined over the last five years, its growth over the next 12 months is expected to be higher. And while Teradyne’s declining EPS over the last five years makes it a less attractive asset to the public markets, its admirable gross margins indicate robust pricing power.

Teradyne’s P/E ratio based on the next 12 months is 38.4x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $192.38 on the company (compared to the current share price of $198.40).