2023-11-01 08:58:06 ET
Summary
- AEHR reported solid FQ1 earnings, but it needs to see some solid orders to reach its full-year guidance targets.
- AEHR's largest customer, ON Semiconductor, issued cautious guidance for Q4, which led to AEHR's stock come crashing down.
- Given ON's LTSAs with silicon carbide and the need to increase capacity over the next few years, the reaction in AEHR looks overdone.
Back in August , I downgraded Aehr Test Systems ( AEHR ) after the stock hit my target price, telling investors it was time to take some profits. Since then, the stock has lost nearly half its value. Let's catch up on the name.
Company Profile
As a quick reminder, AEHR is a semiconductor test equipment manufacturer. Its systems use the burn-in process to stress test chips for early failures. Its systems can perform tests at both the wafer level (before the die is packaged) or at the package level (after the die is packaged).
Typically, the bulk of AEHR's revenue comes from selling wafer-level burn-in and test systems. These systems tend to have an expected life of between two to seven years. The company also sells consumables that are used with its test equipment.
Fiscal Q1 Earnings and ON Semiconductor Driven Sell-Off
For fiscal Q1, AEHR reported revenue of $20.6 million, up 93% from a year ago. That topped analyst estimates calling for revenue of $19.3 million.
WaferPak and DiePak consumables revenue accounted for 55% of total revenue in the quarter compared to just 5% a year ago.
Gross margins came in at 48.4%, up 640 basis points year over year. On a sequential basis, gross margins slipped -310 basis points. The sale of aligners weighed on gross margins in the quarter.
Net income was $4.7 million, or 16 cents per share, versus $0.6 million, or 2 cents per share. Adjusted EPS, which takes out stock comp, was 18 cents, 2 cents ahead of the analyst consensus.
Bookings were recorded at $18.4 million, while its backlog was $22.3 million at quarter end. Effect backlog, which includes orders placed after fiscal Q1, was $24.0 million.
For the quarter, AEHR has generated $3.9 million in operating cash flow. Free cash flow is $3.3 million.
Turning to its balance sheet, AEHR ended the quarter with cash and short-term investments of $51.0 million. It has zero debt. The company did not sell any shares under its ATM program and it has $17.7 million remaining under the program.
Looking ahead, the company reiterated guidance for revenue to increase by at least 50% to over $100 million. It is projecting profits to increase by over 90% to at least $28 million.
On its FQ1 earnings call, CEO Gayn Erickson said:
"So of our current six customers, I mean, more than half of them, certainly, our top two largest customers, we're expecting orders for both bookings and shipments during this year. I think more than half of the six customers are all going to have bookings and revenue shift within the year and then a number of new customers as well. And we kind of alluded to, both with the GaN-related and the large benchmark. I'm feeling really good. It's kind of hard to put our finger on it. We probably shouldn't tell you exactly when they're going to come anyhow, but we're certainly trying to give you enough [heads up]."
AEHR reported a decent quarter and reiterated its full-year guidance. The revenue growth was nice, especially on the consumable side of its business, which saw a big increase.
However, gross margins were a little light, coming in below full-year expectations of 50%+. Given its strong consumable sales, this was a bit disappointing, as were operating margins.
With guidance for full-year revenue of $100 million, with $20 million in FQ1 and an effective backlog of only $24 million, the company is also going to need some pretty big orders to come in to meet its forecast.
Now AEHR has some pretty heavy customer concentration risk. One customer made up 82% of its fiscal 2022 revenue, two customers represented 79% of its fiscal 2023 sales, and one customer accounted for 88% of its FQ1 2024 sales. That large customer is presumably ON Semiconductor ( ON ), which has been doing very well on the silicon carbide side of its business.
Shares of AEHR were sent spiraling lower after ON reported its Q1 results the day before Halloween. The semiconductor company beat results on both the top and bottom lines, driven by a 33% increase in automotive revenue to $1.2 billion.
However, Q4 guidance calling for revenue of between $1.95-2.05 billion fell short of analyst estimates of $2.18 billion. ON blamed softness in Europe with Tier 1 customers as the reason for the cautious guidance, noting these customers have to work through some of their inventory.
Asked about if there were any secular changes to the silicon carbide story on its Q3 earnings call, ON CEO Hassane El-Khoury said:
"No, no change on the secular trend for EVs. EVs are going to grow. They're going to grow for us in the fourth quarter as well. It's just not going to grow in the fourth quarter at the rate that we expected. And of course, we're all looking at the same headlines as far as EVs are concerned. I think EVs are a long-term growth opportunity, even with the backdrop of a lot of the headlines that we're seeing. Customer designs have not slowed down, conversions to EV platforms have not slowed down. I take this as temporary -- while a lot of the macro stuff gets worked out, whether it's the interest rates, which you called it, the expenses associated with purchasing EVs to the cost -- to the energy cost. All of that is just -having an impact, but we do not change our long-term view of the opportunity we have in EV. And like I said, we're still going to grow in Q4, just not at the rate [expected]."
Right now, there does appear to be some weakness at AEHR's largest customer impacting its silicon carbide expectations in the near term due to some EV auto softness among European automakers. However, ON has a lot of SiC capacity commitments and will need to continue to expand its production to meet these commitments. Thus, while it is possible orders for AEHR's test equipment could be delayed, so should still come through.
Valuation
AEHR currently trades at an EV/EBITDA multiple of 28.5x the FY24 (ending May) consensus of $28.5 million. Based on FY25 EBITDA projections of $41.3 million, it trades at a 19.7x multiple. Note that its EBITDA estimates are the same as when I last looked at the stock.
On a PE basis, the company trades at 21.7x the FY24 consensus of $1.04.
Revenue is projected to grow over 58% this fiscal year and 55% in FY2025.
As I noted in my previous article, I don't think a ~30x forward EBITDA multiple is out of line for valuing AEHR given its growth.
Conclusion
As a semiconductor equipment manufacturer serving a few large clients, AEHR can produce some lumpy results. Given the current macro environment and some recent EV sales weakness, it shouldn't be surprising that its largest customer ON issued some cautious guidance for Q4.
However, ON is building out its carbide silicon capacity in order to meet demand from $11 billion in signed LTSAs. As recently as last month the company said it expects the SiC market to grow 30-35% and for it to grow at 2x the market. Thus, AEHR is still going to have to supply test equipment and consumables to ON even if the semiconductor firm sees a near-term slowdown.
As such, I think the sell-off in AEHR is overdone and will boost my rating back to "Buy." My target is $45, which is a ~30x multiple on FY25 EBITDA. That said the investment is best for risk-tolerant investors, as stated above, because this is a lumpy business with only a few large customers.
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Aehr Test Systems: Sell-Off Looks Overdone