Summary
- Aehr has a big opportunity as SiC production growth explodes higher.
- SiC will ride EV demand higher given its superior thermal conductivity.
- AEHR stock has been winning new SiC customers who are buying its test equipment.
Aehr Test Systems ( AEHR ) should greatly benefit from the huge increase in production of silicon carbide (SiC) in the coming years and the need for new test equipment. I think the stock has solid upside from here, but would be even more interested in the name on a dip.
Company Profile
AEHR develops and manufactures semiconductor test equipment to check microprocessors, microcontrollers, digital signal processors, memory ICs, sensors, power devices, and optical devices. AEHR's systems perform what is referred to as burn-in, which is a stress testing procedure for semiconductors that can take anywhere from minutes to days. This can be done at the wafer level (before the die are packaged) or at the package level (after the die are packaged). The burn-in process screens for early chip failures, while afterwards the semiconductors undergo a final test process using automatic test equipment.
Chips in the automotive, mobility, networking, and telecommunications markets all need to meet quality and reliability specifications and therefore be tested. AEHR's equipment tests silicon carbide devices that are used in electric vehicles; silicon photonics that are found in data centers and 5G infrastructure; as well as 2D/3D sensors that are found in consumer electronics, data storage, memory chips, and automotive applications.
Over 90% of AEHR's revenue comes from its line of wafer-level burn-in and test systems. These devices typically have a two-to-seven-year lifespan. The company uses a razor-razor blade model where it sells the test equipment system, but where there is a consumable input that goes into the system, creating a recurring revenue stream from its installed base.
Opportunities
One of AEHR's biggest opportunities is in the automotive market, especially with regard to silicon carbide. Silicon carbide technology is becoming the go-to power technology for eclectic vehicles (EVs) given its superior thermal conductivity and higher energy efficiency compared to traditional silicon. The power electronics in EVs must be able to withstand high temperatures in order to charge quickly and drive farther, which SiC components allow it do.
Thus, as EV production increases, silicon carbide production is expected to increase as well. Earlier this month, Blue Wave Consulting predicted that the SiC Power semiconductor market would grow at a CAGR of 16.8% between 2023 and 2029. Analysts at William Blair, meanwhile, forecast that the SiC market for devices and electric vehicles would grow from 119,000 6-inch equivalent SiC wafers for electric vehicles in 2021 to more than 4.1 million 6-inch equivalent wafers in 2030. That's a bold prediction, equating to nearly a 50% CAGR.
For its part, SiC semiconductor company Wolfspeed ( WOLF ) sees the TAM for SiC power devices nearly tripling from $2.2 billion to $6 billion by 2026.
WOLF Presentation
Given the expected demand, companies such as WOLF and STMicroelectronics (STM) have been looking to rapidly grow their SiC production through building new manufacturing facilities.
For its part, AEHR added two new silicon carbide customers in FQ2 (ended November), including one of the world's largest suppliers of silicon carbide devices. It said the second customer is a "multi-billion-dollar annual revenue global manufacturer semiconductors that serves multiple markets, including supplying devices to the automotive industry."
In FQ1, the company noted that it already has 2 of the 4 largest silicon carbide market participants as customers. The company says it remains in talks with other SiC companies and several up-and-coming suppliers as well.
When looking at the opportunity from AEHR's perspective, it is really in the 1st inning of being the primary testing equipment supplier for multiple companies that are looking to rapidly grow their production and testing capabilities to meet the demand for SiC. The company has only sold a few testing systems into this market at this point, meaning all futures orders just lead to incremental growth.
In addition to SiC, AEHR also benefits from the general proliferation of chips that are found in the auto industry. There is a clear trend of more electronics in vehicles, and these all need to be tested.
The company also serves other attractive markets, primarily in the 5G infrastructure and data center spaces that use silicon photonics. Companies in this space are forecast to begin integrating photonics transceivers into microprocessors, graphics processors, and chipsets. If this happens, this would also be a significant testing market for AEHR.
Risks
While AEHR is riding some secular trends, it isn't immune to cyclical trends in the near term. EV demand and production can play a role in the results AEHR puts up. Tesla ( TSLA ) uses silicon carbide-based MOSFETS in all its vehicles, and EVs from other car manufactures all need traction inverters that preferably use SiC. Thus, any shifts in demand or production in this market can ultimately impact AEHR.
The economy can also play a role with other chip components. For example, AEHR's silicon photonics business has still been in the process of recovering since the pandemic. Any supply chain issues can also impact testing.
AEHR also heavily relies on its top five-largest customers, which accounted for 98% of its revenue in fiscal 2022. In fact, its top customer accounted for a whopping 82% of its sales last fiscal year. Its top customer the year before accounted for 24% of revenue. Thus, customer concentration is certainly a risk.
Systems are also expensive, ranging in costs from $300,000 to $1 million per system. This can also create lumpy results. Any delays or cancelled orders could cause the company to miss near-term revenue and earnings projections.
AEHR also added new language around competition when it filed its most-recent 10-K in August. The company add to its Risk Factors: "The Company expects that its DiePak products for burning-in and testing multiple singulated die and small modules face significant competition. The Company believes that several companies have developed or are developing products which are intended to enable test and burn-in of multiple bare die, and small modules."
Valuation
AEHR currently trades at an EV/EBITDA multiple of 32x the FY24 (ending May) consensus of $32 million. Based on FY25 EBITDA projections of $43 million, it trades at a 21x multiple.
On a PE basis, the company trades at 33x the FY24 consensus of $1.03. The FY25 estimates is for EPS of $1.47, putting its multiple at 23x.
Revenue is projected to grow 24% this fiscal year, accelerating to 55% next year and 45% in FY2025.
Given the explosive growth of the SiC market and AEHR's prime role to benefit, I don't think a ~30x forward EBITDA or EPS multiple is out of line for valuing the company. This would put the stock around $45, giving it nearly 30% upside from here.
Conclusion
AEHR is one of the more-interesting ways to play the trend in silicon carbide. This is an explosive growth market that is going to need a lot of testing equipment in the future. Meanwhile, the building of new multi-billion dollar SiC production facilities only solidifies the solid future growth for the company.
However, results for testing equipment can be lumpy, and AEHR's backlog is expected to grow faster than its revenue this fiscal year as new facilities get built and production ramps up. Any delays or issues in these facilities would then push back growth for AEHR
Given where AEHR trades, I don't think the stock is overly expensive given its projected growth in outer years.
I would be more interested in starting a long position in the mid to upper $20s, given some of the risks the company could face. However, this is not a bad place to begin a starter position.
For further details see:
Aehr Is Set To Ride The Silicon Carbide Wave