We recently compiled a list of the 20 Industrial Stocks Already Riding the AI Wave. In this article, we are going to take a look at where Teradyne, Inc. (NASDAQ:TER) stands against the other industrial stocks that are already riding the AI wave.
When investors think of artificial intelligence (AI), they usually relate the thought to prominent hardware and software companies working in the technology sector. However, a much wider understanding of AI is needed in order to pick out the best stocks that are likely to ride the AI wave as it evolves over time. Contrary to public opinion, one of the smartest ways of jumping on the AI bandwagon is by playing the industrial sector. Since the start of 2023, the beginning of the AI boom in other words, industrial stocks have jumped close to 30% in value. Of these, the firms that are directly exposed to AI verticals have more than doubled in value. According to a Goldman Sachs study on the matter, in the fourth quarter of 2023, over 30% of industrial firms mentioned AI in their earnings reports, up from just 10% in the same period the preceding year.
In addition to the obvious picks in the semiconductor space, investors should turn their attention towards industrial firms that provide construction, engineering, electronics, cooling, and connectivity services. Even though these firms derive only a portion of their revenue from AI at the present, the explosive growth potential of AI can be a meaningful driver of their revenues in the coming months. Indeed, some indications of this can be gleaned from the fact that industrial firms linked to AI grew their revenues by almost 15% last year. This number is comfortably above their non-AI peers and the S&P 500 average for 2023. Industrial firms help manage the computational powers of AI data centers, make high speed connections possible, and also make sure they operate at optimal temperatures.
Lazar Naiker, an analyst at capital markets firm AGF Investments, explains how traditional data centers are different from AI ones. Essentially, AI data centers are powered by graphic processing units (GPUs), while their traditional counterparts are powered by central processing units (CPUs). GPUs operate at a faster speed and thus need higher bandwidth cables for communication with other GPUs. There is a 10 to 1 difference in the number of cables needed to power GPUs and CPUs. AI applications require constant communication between data center GPUs as well, the development of neural networks, so to speak, whereas this is not the case for CPUs. Another key difference is power consumption. Per Naiker, the GPU uses almost 5 times the power required by a CPU.
Our Methodology
For this article, we selected industrial stocks that posted more than 25% gains in 2024. From this list, we selected firms that have links to the AI universe and approximated percentage revenues based on these links. These stocks are also popular among hedge funds. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A team of engineers discussing around a fully-equipped flex test platform system.
Teradyne, Inc. (NASDAQ:TER)
Number of Hedge Fund Holders: 34
YTD Return as of August 1: 25%
Approximate Percentage Revenue from AI: 40%
Teradyne, Inc. (NASDAQ:TER) designs, develops, manufactures, and sells automated test systems and robotics products worldwide. In the past few months, investments in advanced semiconductor manufacturing and fabrication have more than tripled, topping $100 billion as manufacturers race to meet the increase in demand for complex chips that are used to run demanding applications for AI products. This has subsequently led to an increase in demand for automated test equipment (ATE), a specialty of Teradyne. ATEs are critical since they bring up AI devices quickly, optimize their yield, and improve silicon performance.
In the second quarter earnings call, Greg Smith, the CEO of Teradyne, Inc. (NASDAQ:TER), explained how Cloud AI products were driving strong demand for ATEs across chip and memory markets. In the first half of 2024, the company was able to exceed the revenue it had made from chipmakers in all of 2023. It also grew the memory business by 30% in the first six months of the year, compared to 2023. Smith, however, cautioned that even though the chip and memory markets remained strong, a meaningful uptick in legacy auto and industrial markets might not occur until 2025.
In its Q4 2023 investor letter, TimesSquare Capital Management, an asset management firm, highlighted a few stocks and Teradyne, Inc. (NASDAQ:TER) was one of them. Here is what the fund said:
“New to the portfolio was Teradyne, Inc. (NASDAQ:TER), which produces testing and measurement equipment for semiconductors and other complex electronic systems. Already a holding in our Mid Cap Growth Strategy, after providing lower-than-expected guidance for the final quarter of its fiscal year Teradyne’s price fell, and its market cap entered the buy range for this strategy. We believed that its chip testing volumes reached a low point and were poised to recover. Since we started buying, Teradyne’s shares rallied 30% for the remainder of the quarter.”
Overall TER ranks 1st on our list of the best industrial stocks that are already riding the AI wave. You can visit 20 Industrial Stocks Already Riding the AI Wave to see the other industrial stocks that are on hedge funds’ radar. While we acknowledge the potential of TER as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TER but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
