Wall Street's Newest Teradyne Bull Just Sent a $2 Billion Signal That the Stock's 56% Crash Went Too Far

On Wednesday, Teradyne (NASDAQ: TER) saw its stock rise by 8.3%, closing at $265.78, following a new buy rating from Jefferies. The financial firm set a price target of $284, suggesting that Teradyne is poised to benefit significantly from the burgeoning artificial intelligence (AI) sector, particularly through its relationship with Nvidia. Jefferies analyst Dushyant Ailani indicated that Nvidia could potentially generate over $2 billion in revenue for Teradyne by 2029. This upward momentum comes in light of a dramatic 56% decline in Teradyne's stock price, which had dropped from a record high of $483.84 on June 30 to $212.74 by last Thursday.

After hours on Wednesday, Teradyne's stock was trading at $260.19, slightly down from the day's closing price, while Nvidia's stock fell roughly 8% following a report from The New York Times regarding an incident involving CEO Jensen Huang. Jefferies' optimistic assessment reflects a belief that the recent selloff of Teradyne's shares was excessive. The firm views the current price as an attractive entry point, with the new target sitting approximately 7% above the Wednesday closing price but still significantly lower than the average target of other analysts, which stands at around $397.73.

The Jefferies report emphasizes Teradyne's role in the AI industry's expansion, noting that every sophisticated chip must undergo testing before being shipped. The report predicts that the market for automated test equipment will grow from approximately $9 billion in 2025 to around $25 billion by 2030. Jefferies anticipates an increase in Teradyne's share of the system-on-chip testing market from 27% to 34%, projecting a rise in revenue from $1.9 billion to $6.9 billion over the same period.

Focusing on Nvidia, Jefferies estimates that Teradyne could capture about 30% of Nvidia's spending on test equipment by the end of 2029, translating to a revenue stream exceeding $2 billion, compared to just $50 million in 2026. This projection relies on contracts that have yet to be secured. For the years 2027 and 2028, Jefferies forecasts revenues of $6.7 billion and $8.5 billion, respectively, slightly above market expectations.

In its latest quarterly report, released on October 27, Teradyne reported a 70% increase in revenue year-over-year, totaling $1.306 billion, with adjusted earnings of $2.29 per share. The company indicated that AI-related revenue reached approximately $500 million. For the fourth quarter, Teradyne expects revenue to be between $1.25 billion and $1.35 billion, projecting a full-year revenue of about $5.2 billion with adjusted earnings of $9.41 per share, which positions the stock at about 28 times this year’s earnings.

However, there is a notable disparity between Jefferies' target and those of other analysts. The average target among analysts covering Teradyne is $397.73, which is about $114 higher than Jefferies' estimate and nearly 50% above Wednesday’s closing price.

Teradyne's stock has experienced considerable volatility this year. After ending 2023 at $125.92 and reaching its peak of $483.84 in late June, the stock has since dropped 56% to $212.74 by November 5, where it lost 15.2% amid a broader chip sector selloff. However, it has rebounded by 12.7% on Monday and the recent 8.3% increase on Wednesday. Since November 5, the stock has risen by 24.9% and is up 37.3% year-to-date, although it remains 45% below its record high.

Historically, the stock has shown a tendency to fluctuate significantly, closing more than 8% away from the previous day's close on 25 occasions this year alone. Following similar spikes, the stock typically trends upward a month later, with a median gain of 4.8%, and shows a higher probability of continued growth over a longer time frame.

For a hypothetical investor, a 67-year-old retiree from Massachusetts who purchased 1,000 shares in January 2016 at $20.34, the stock's recent performance represents a significant return on investment. With the shares now valued at 13 times the original purchase price, they comprise a notable portion of the couple's retirement portfolio. The stock also pays a modest dividend, contributing to their income, though the primary motivation for holding Teradyne shares remains the potential for future growth.

As the couple evaluates their financial strategy, they must consider whether to sell, reduce their holdings, or maintain their current investment in Teradyne, especially in light of the recent market dynamics and the company's growth potential.