AI growth brings new tests for semi-test duopoly

JPMorgan highlights the semiconductor test market's heightened importance due to its exposure to AI infrastructure, intensifying the competitive dynamics between duopoly leaders Advantest and Teradyne, which together control over 85% of the $6 billion market. Advantest is positioned as the clear leader in AI Compute testing, notably as the sole equipment provider for Nvidia's AI GPU projects, while Teradyne maintains strength in custom ASICs and is actively regaining share in high-bandwidth memory (HBM) testing. Despite the semi-test segment shrinking as a share of the broader Wafer Fab Equipment market and facing macroeconomic headwinds, both companies are expected to benefit from the increasing complexity of chips and rising test demands driven by AI, leading JPMorgan to rate both stocks Overweight.

Analysis

The semiconductor test market, a $6 billion duopoly controlled by Advantest and Teradyne with over 85% combined share, is gaining strategic importance due to its critical role in the AI infrastructure build-out. According to JPMorgan, Advantest has secured a decisive lead in the high-growth AI Compute segment, primarily through its position as the sole testing equipment provider for Nvidia's AI GPU projects, leveraging its V93000 SoC testers. This has given Advantest a dominant 55% share in the custom ASIC market. In contrast, Teradyne holds a 45% share in custom ASICs but has limited exposure to GPU testing. However, Teradyne is strategically repositioning itself to capture growth in the high-bandwidth memory (HBM) sector, with its new Magnum 7H platform expected to reduce HBM wafer test time by 40% and help it regain market share. While near-term HBM demand may moderate after a strong 2024, the long-term outlook is supported by increasing chip complexity, with future Nvidia GPUs projected to dramatically increase HBM content. This positive outlook is tempered by headwinds, including the semi-test segment's declining share of the broader Wafer Fab Equipment market (from 8% in 2014 to 5% in 2024), macroeconomic uncertainty, and emerging competition from low-end Chinese vendors.

Key Decisions for Investors

• Given Advantest's sole-source relationship with Nvidia for AI GPU testing, investors seeking direct exposure to the AI hardware ecosystem should view it as a key enabler with a significant competitive moat.
• Investors should closely monitor Teradyne's market share progression in the high-bandwidth memory (HBM) test market, as successful adoption of its new Magnum 7H platform could serve as a significant catalyst for the stock.
• Despite the strong AI tailwinds, it is crucial to weigh the shrinking share of the semi-test segment within the overall Wafer Fab Equipment market and the rise of low-cost competition as potential long-term risks to the valuation of both duopoly players.
• For relative value assessments, consider that while Advantest currently holds a stronger position in the highest-growth AI segments, Teradyne's potential to disrupt the HBM test market presents an opportunity for a shift in the competitive balance.