With the growing adoption of advanced electronic devices worldwide, the demand for chip-testing has also increased greatly as it seeks to achieve precision in integrated circuit designs. Chip-testing is required across various consumer electronic devices such as smartphones, smartwatches, and tablets. Moreover, major breakthroughs in cloud computing, Internet of Things (IoT) technologies, and artificial intelligence (AI) should further increase the demand for chip testing. According to a report by Allied Market Research, the global outsourced semiconductor assembly and the testing market is expected to reach $52.93 billion by 2030, growing at a CAGR of 4.9%. As a result, both Keysight Technologies, Inc. (KEYS) and Teradyne, Inc. (TER) should benefit.

KEYS provides electronic design and test solutions to networking, automotive, semiconductor, and electronic industries in the Americas, Europe, and the Asia Pacific. The company sells its products through a direct sales force, distributors, resellers, and manufacturer’s representatives. TER designs, develops, manufactures, sells, and supports automatic test equipment worldwide. The company operates through Semiconductor Test, System Test, Industrial Automation, and Wireless Test segments.

KEYS is down more than 23% year-to-date (YTD) and TER is down 28% in the same time frame.  Which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On February 15, 2022, KEYS announced that the company had signed a memorandum of understanding with Samsung Research to advance the research and development of 6G technology, the next generation of wireless communication. The collaboration will accelerate the development of AI-enabled air interfaces that leverage massive multiple input multiple output antenna technologies.

On January 27, 2022, TER’s CEO and President Mark Jagiela said, “We enter 2022 with strong long-term test and automation demand trends in place and we’ve increased the mid-point of the revenue and non-GAAP earnings per share estimates in our 2024 earnings model to $4.9 billion and $8.00 respectively.”

Recent Financial Results

KEYS’ revenue surged 6% year-over-year to $1.25 billion for the first quarter ended January 31, 2022. Its income from operations grew 27% year-over-year to $271 million, while its non-GAAP net income came in at $305 million, representing a 13% year-over-year increase. Its non-GAAP EPS came in at $1.65, up 15.4% year-over-year.

TER’s revenue surged 17% year-over-year to $885 million for the fourth quarter ended December 31, 2021. Its non-GAAP operating income grew 21.6% year-over-year to $274.30 million, while its non-GAAP net income came in at $238.40 million, representing a 23.4% year-over-year increase. Its non-GAAP EPS came in at $1.46, up 25.9% year-over-year.

Expected Financial Performance

KEYS’ tangible book value and EPS grew at CAGRs of 29.9% and 74.5%, respectively, over the past three years. Analysts expect R’s revenue to increase 6.9% in fiscal 2022 and 5.4% in fiscal 2023. The company’s EPS is expected to grow 12.7% in fiscal 2022 and 7.8% in fiscal 2023. Moreover, its EPS is expected to grow at a rate of 10.2% per annum over the next five years.

On the other hand, TER’s tangible book value and EPS grew at CAGRs of 26.8% and 33.3%, respectively, over the past three years. The company’s revenue is expected to decrease 5.9% in fiscal 2022 but increase 22.2% in fiscal 2023. Its EPS is expected to decline 19.1% in fiscal 2022 but grow 40.1% in fiscal 2023. Also, TER’s EPS is expected to grow at a rate of 14.2% per annum over the next five years.

Profitability

KEYS’ trailing-12-month revenue is 1.35 times what TER generates. KEYS is also more profitable with a gross profit margin of 63.18% compared to TER’s 59.59%.

However, TER’s ROE, ROA, and ROTC of 42.75%, 20.20%, and 27.74% are higher than KEYS’ 25.89%, 9.43%, and 12.61%, respectively.

Valuation

In terms of forward non-GAAP P/E, TER is currently trading at 24.10x, 6.7% higher than KEYS’ 22.59x. However, KEYS’ forward EV/EBITDA ratio of 17.56x is 16.4% higher than TER’s 15.08x.

POWR Ratings

KEYS has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, TER has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

KEYS also has a B grade for Sentiment, consistent with analysts’ expectations that its EPS and revenue will increase significantly in the current year. On the other hand, TER has a Sentiment grade of D, consistent with analysts’ expectations that its EPS and revenue will decline in the current year.

Of the 49 stocks in the Technology – Electronics industry, KEYS is ranked #4. However, TER is ranked #62 out of 97 stocks in the Semiconductor & Wireless Chip industry.

Beyond what I’ve stated above, we have also rated the stocks for Growth, Quality, Stability, Momentum, and Value. Click here to view all the KEYS ratings. Also, get all the TER ratings here.

The Winner

The chip-testing industry is expected to perform well due to the increase in demand for consumer electronics and the surge in urbanization across the globe. While both KEYS and TER are expected to gain, it is better to bet on KEYS now because of its superior growth prospects.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Technology – Electronics industry here. Also, click here to access all the top-rated stocks in the Semiconductor & Wireless Chip industry.

KEYS shares were trading at $159.35 per share on Friday afternoon, up $0.85 (+0.54%). Year-to-date, KEYS has declined -22.84%, versus a -8.07% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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