Citi: Teradyne’s compute testing enters a digestion period as memory and automotive take over as growth drivers

Why did overall performance still exceed expectations as the compute business slowed?

Teradyne’s third-quarter results and subsequent guidance exceeded Wall Street expectations but fell slightly short of higher investor expectations. Earnings per share were 2.30 dollars, above Citi’s previous forecast of 2.00 dollars.
Management said the compute testing business entered a temporary digestion period after a record first half of 2026, and the timing of procurement projects also had an impact; strong performance in memory, automotive and industrial, system testing, product testing and robotics offset the impact.
Compute accounted for about 20% of third-quarter revenue; sequential growth in non-compute revenue came mainly from automotive and industrial, while mobile was roughly flat.

Management expects revenue to grow sequentially throughout 2027 as the order backlog strengthens, visibility across quarters improves, and dual-supplier compute testing programs for cloud providers and commercial GPU customers progress. Citi forecasts full-year revenue of 6.469 billion dollars, up 23.9% year over year.
The company expects strong growth in memory testing in 2027, with high-bandwidth memory (HBM) remaining the main driver. Management noted that lower HBM stack heights could increase demand for performance testing, an area where Teradyne has a high share.
Citi expects revenue to rise slightly sequentially in the first quarter of 2027, with larger increases in the second and third quarters. For the fourth quarter of 2026, it expects a slight sequential decline in semiconductor test revenue, offset by modest growth in product testing and robotics.

Teradyne began recognizing revenue from GPU test equipment in the second quarter of 2026. Its contribution remained small in the third quarter and may be limited in the fourth quarter as well. Management expects GPU revenue to continue rising in 2027, at a pace similar to the company’s overall revenue growth.
The company reiterated its four-year roadmap: GPU test equipment share will gradually rise from the low single digits to 10%, then 20%, and ultimately 30%, with the original timetable unchanged.
The ramp-up of the next project for its first major cloud customer has been delayed from early 2027 to around midyear because of the customer’s project schedule; management believes the overall opportunity remains the same size. The company also said a competitor was already involved in the customer’s business, and Teradyne plans to defend its existing high share.

Management expects a gross margin of about 59% in 2027, roughly flat year over year: weaker at the beginning of the year, then improving as volumes rise and new-product costs fall.
Higher memory component prices will weigh on gross margin, especially for products other than memory test equipment. The company has added surcharges to some products and may raise prices further if costs continue to rise; however, it will be more cautious about price increases for products where it is seeking to gain share.
Citi expects operating expenses may grow faster than its previous rule of thumb of roughly half the revenue growth rate, as revenue is expected to grow about 64% in 2026 while operating expenses grow only about 21%, and R&D spending needs to catch up.
Citi maintained its buy rating and 400-dollar target price, using a sum-of-the-parts valuation; its 2027 earnings-per-share forecast is 11.99 dollars.