Microsoft (Nasdaq: MSFT) is a compelling investment. Analysts expect the software giant’s stock to return +70% to +110% during the next three or four years.

Furthermore, its current price-to-earnings ratio (P/E) of 12 looks cheap next to its five-year average P/E of 19 and the industry average of 19. At about $26, its shares are discounted -19% from their one-year high.

But as bright as the future appears to be for Microsoft, it probably won’t keep pace with a mid-size tech firm I like. Although this firm is only a tenth the size of Microsoft in terms of market cap, it’s the world’s leading maker of automated test equipment for semiconductors, telephone lines, circuit boards and software. It also makes circuit board connectors (known as backplane systems) for the military/aerospace, computer and communications industries.

From its current price of about $10.80, this stock is projected to rise as much as +175% — +65% more than Microsoft’s estimate — during the next three or four years.

Assuming the predictions prove accurate, $10,000 invested in Microsoft now could grow to as much as $21,000, excluding taxes and account fees. Though very good, that’s still $6,500 less than the $27,500 you might have in three or four years, again excluding any expenses, if you put the $10,000 into this mid-cap tech stock.

That company is Teradyne (NYSE: TER), and it’s just the kind of behind-the-scenes player I prefer. Whereas an outfit like Microsoft is so often in the public eye, Teradyne quietly goes about its business of providing crucial support services to higher-profile tech, communications and other companies. That’s how it has operated for more than five decades.

A diverse portfolio
Teradyne has a large portfolio of products, but one of its key offerings is the J750 system. This system tests microcontrollers and other semiconductor devices found in the electronic components of things such as automobiles and home appliances. Another major Teradyne product is the FLEX test platform, which is used to assess the function of a range of consumer electronics including cell phones, HDTVs and video game controllers.

A couple years ago, Teradyne acquired Nextest Systems to expand its ability to test microcontrollers, image sensors and other types of integrated circuits. Around the same time, it bought Eagle Test Systems to gain access to testing systems for the various types of radio frequency semiconductors found in digital cameras, MP3 players, notebook and desktop computers and many other types of electronics.

Back from the doldrums
After a couple lean years, Teradyne is impressively rebounding. Sales more than doubled in the second quarter to $390 million from $115 million in the second quarter of 2009. It just reported third quarter sales of $502 million, a +92% increase over the same period a year ago.

Per-share earnings have bounced back, too, to $0.69 in the second quarter and $0.82 in the third quarter — astounding increases of +393% and +382%, respectively, over the second and third quarters of 2009. For all of 2010, Teradyne is on course to generate total sales of more than $1.7 billion and earn $2.40 a share — by far its best showing in years. Analysts project annual earnings will grow by +17.5%, on average, through 2015.

Lately, Teradyne’s success has been mainly in the mobile/wireless and microcontroller markets, though demand for its products has been strong across many electronics sectors. The company is also expanding into new areas such as hard drives and flash memory. And it has been reducing expenses. For example, product and service costs (as a percentage of sales) have fallen from more than 70% to about 50% this year.

Now an even better value
When Teradyne announced its +382% increase in third quarter earnings on October 27, its shares plunged by more than -10%, from about $11.75 to $10.60, then bounced around a bit before settling around $10.80. Odd, yes, but it’s just the sort of thing you might expect from the market, which was overreacting to the likelihood that Teradyne’s fourth quarter won’t measure up to its second and third quarters.

It doesn’t bother me, though. If Teradyne was a cheaper buy than Microsoft before, now it looks like an even better value by comparison. Its lower P/E of 10.7 is one good indicator of that. An even better sign is its EV/EBITDA ratio of 5, versus 7 for Microsoft. Furthermore, Teradyne shares are nearly -20% off their one-year high and -40% below their five-year peak.

Action to Take –> Don’t let the recent price gyrations spook you. Teradyne is, after all, a mid-cap firm, and that sort of crazy, short-term stock price behavior goes with the territory. Focus instead on the company’s long-term prospects, which point to outperformance. If you buy the stock and hang in with it for at least a few years, you’ll likely leave the overall market and much bigger, better known tech players like Microsoft in the dust.