Aehr: This One Looks Like A Dud

PonyWang

Investment Thesis

Aehr Test Systems (NASDAQ:AEHR) is simply a mini instrumentality shaper engaged successful building devices utilized to trial and inspect electrical components, namely semiconductor wafers. Burn-in is simply a process of forcing a instrumentality to activity nether abnormal conditions successful bid to guarantee its longevity. By forcing nan instrumentality to activity nether a stressful environment, defects whitethorn beryllium uncovered and pinpointed, frankincense helping to minimize immoderate early malfunctions and failures of nan physics devices containing these semiconductors.

During nan thermal screening, nan temperatures are accrued slow complete a play of clip to guarantee that nan instrumentality is capable to withstand utmost power conditions without immoderate malfunctions aliases breakdowns. Another constituent of burn-in testing is electrical probing, which is nan process of applying electrical existent to nan wafer successful bid to find retired nan weakest points.

The request for the AEHR's wafer-screening systems is simply a usability of CapEx decisions of a mini group of customers, chiefly consisting of semiconductor manufacturers specified arsenic Texas Instruments (TXN), Intel (INTC), STMicroelectronics (STM), ON Semiconductor (ON), each of which person been awesome customers for AEHR, pinch nan second driving a important information of nan maturation seen successful caller quarters.

AEHR is excessively mini to beryllium impacted by world manufacture trends. In FY2021, erstwhile nan manufacture was booming successful nan aftermath of COVID stimulus checks, AEHR gross declined 27% connected a YoY. Now nan manufacture is adjusting to excess capacity, AEHR is expanding its gross guidance. Given nan company's debased gross base, single-customer orders and acquisition decisions person a important effect connected maturation rates.

The institution is enjoying momentum, supported by a beardown bid backlog, large capable to push guidance to raise capital to money nan moving superior basal to meet demand. Shares person risen by much than 10 fold since nan 2021 lows, materializing nan bullish thesis of galore of my chap Seeking Alpha contributors complete nan past fewer years.

At this stage, I judge that nan institution is overvalued. Our waste standing mirrors AEHR's precocious value multiples, deficiency of merchandise differentiation, gross cyclicality (for some systems and consumables), and agelong income lead, weighed against short-term gross maturation from a fewer ample customer orders. Share value momentum will apt slice successful nan coming 12 to 18 months.

Revenue Results

Last month, AEHR reported gross for nan 3 months that ended November 2022, showing a income summation of $14.8 million. While nan magnitude is small, nan merchandise was met pinch enthusiasm arsenic results were a important betterment from nan anterior period, enticing speculation that it represents a basal displacement successful nan company's fortunes and marketplace position. I can't wholly work together pinch this assessment. If AEHR's gross summation was from an betterment successful marketplace position, 1 would person seen a much wide user base. Instead, during nan quarter, 1 customer represented 80% of revenue, and different contributed 15%.

The institution precocious signed a $25 cardinal agreement with a returning customer to acquisition a number of Fox-P testing systems for its silicon carbide and gallium nitride semiconductors utilized successful nan automotive industry. Earlier this year, nan institution besides announced a qualification bid for 1 instrumentality from a caller customer, besides for testing EV silicon carbide applications. The institution is banking connected affirmative gross maturation owed to nan expanding fame of EVs and consequent higher request for silicon carbide and gallium nitride semiconductors.

Forecasts from William Blair estimate that nan silicon carbide marketplace for devices successful electrical vehicles alone, specified arsenic traction inverters and on-board chargers, is expected to turn from 119,000 6-inch balanced silicon carbide wafers for electrical vehicles successful 2021 to much than 4.1 cardinal 6-inch balanced wafers successful 2030, representing a compound yearly maturation complaint (CAGR) of 48.4%. This equates to almost 35 times larger successful 2030 than successful 2021. AEHR press release January 25, 2022.

Management argues that successful nan agelong run, nan maturation of request for nan Wafer-Level Burn-in Test Market will beryllium propelled by nan accrued take of smartphones, tablets, wearable devices, and Electric Vehicles globally. The displacement to Carbide-based semiconductors is besides cited arsenic a gross tailwind, fixed that this worldly has precocious responsibility rates connected nan wafer level, but those who walk nan trial are very reliable, making Wafer-Level-Burn-In testing an charismatic attack compared to different testing methods. Along these lines, nan CEO states:

The beauty of it, and it's a small odd, but arsenic a tester guy, nan beauty of it for america is while silicon carbide is highly reliable long-term, it really has a very precocious babe mortality rate, which intends that a higher percent of nan devices neglect early successful nan first truthful galore hours of use. But aft that, they don't neglect anymore, and they're overmuch little -- aliases overmuch higher reliability aliases little nonaccomplishment rates than different components. And they're overmuch much efficient. That's nan cleanable dream for america because that intends you request our instrumentality to spell successful and weed retired nan babe mortalities by testing them for hours, days astatine a clip to region nan babe mortality, and past they're much reliable. Q1 2021 Gayn Erickson

I don't judge nan company's vulnerability to favorable marketplace trends is simply a logic to bargain nan stock. The institution missed nan 2021 semiconductor boom, and it is not guaranteed to seizure nan SiC tailwind. For example, betwixt 2010 and 2021, world semiconductor income astir doubled from $298 cardinal to $580 billion, yet, AEHR only succeeded successful adding $6 cardinal to its gross during nan period, from $10 cardinal successful 2010 to $16 cardinal successful 2021.

Market Position and Valuation

While it is commonly assumed that income will emergence on pinch nan rising usage of SiC for EVs, nan company's humanities capacity and nan deficiency of relationship betwixt manufacture tailwinds and nan company's income springiness maine a logic to beryllium pessimistic. The institution faces title from backstage SMEs specified arsenic Scientific Test, Inc, which sells its devices astatine a starting constituent of $30,000, to integrated semiconductor manufacturing strategy providers trading their solutions for hundreds of millions specified arsenic Teradyne (TER) to Industrial conglomerates pinch vulnerability to nan ATE marketplace specified arsenic Fortive (FTV) done its subsidies Xcerra and Tektronix. Even aesculapian instrumentality manufacturers specified arsenic Agilent (A) and Danaher (DHR) compete successful this market.

Despite nan deficiency of merchandise differentiation, AEHR stock trades astatine a important value premium compared to peers, arsenic shown successful nan chart below.

Data by YCharts

Summary

Aehr is 1 of nan smallest ATE manufacturers, mirroring its low, competitory moat. The ATE marketplace is highly fragmented and intensely competitive. The company's maturation successful caller quarters is attributed to orders from 2 customers. Beyond these orders, income will apt revert to mean averages, fixed nan cyclicality of request for nan company's systems and consumables. Thus, caller gross maturation successful nan past quarters doesn't reflector a alteration successful nan company's marketplace position.

Although nan accumulation of semiconductors has accrued exponentially complete nan erstwhile decade, nan company's income has remained comparatively stable. Despite favorable marketplace conditions successful nan agelong term, location is small logic to expect nan institution to benefit. Our waste standing mirrors nan company's low, competitory moat, constrictive customer base, and overvaluation comparative to peers, weighed against income momentum, debased PEG ratio, and backlog build-up.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

Bashar is simply a contributing writer astatine Seeking Alpha, focusing connected Long/Short finance ideas, pinch a geographic attraction successful North America. Before that, Bashar worked astatine an Investment Fund successful nan United Kingdom. He has a Master's grade successful Finance from nan Queen Mary University of London and a Bachelor's grade successful Economics from Middlesex University.