A company that excels in its niche in a growing industry is usually worth watching. And when its stock just fell sharply to a much more reasonable valuation – that makes it even more interesting. Such is the case with semiconductor company Aehr Test Systems (NASDAQ:AEHR).
This stock has the potential for outsized growth that could see it double in value over the next couple of years from its roughly $29 per share price. And while there are some red flags to watch out for, the growth potential is too promising to ignore.
50% revenue growth expected in 2024
Aehr Test Systems is a company that manufactures testing systems for silicon carbide (SiC) chips. These are chips that are preferable for higher voltage and higher temperature applications, including electric vehicles (EVs), 5G cellular technology, and solar inverters, among others. The market for silicon carbide has been growing rapidly with the adoption of EVs, but it is just scratching the surface of its potential.
A recent report from McKinsey & Co. found that the SiC market is expected to grow at a compound annual growth rate of about 26% between now and 2030 – from the current $2 billion to $11 billion to $14 billion by 2030. McKinsey said 70% of the demand is expected to come from EVs.
Aehr Test Systems does not make SiC chips, or wafers, as they are called, but they do make the test systems for these devices, called burn-in tests. Established in 1977, Aehr Test Systems is the leader in this niche market, which only has about a handful of major players. It has installed more than 2,500 test systems worldwide and is well positioned to grow with this market.
The growth this year has been robust as, in the fiscal first quarter of 2024, ended Aug. 31, the company generated $20.6 million in revenue, a 93% increase year-over-year. Net income shot up some 700% to $4.7 million, or 16 cents per share, up from 2 cents per share in the same quarter of 2022. President and CEO Gayn Erickson said it was the best first quarter in the companyʻs history.
Also, Aehr had $18.4 million in bookings in the quarter and $22.3 million in backlog, up 14% year-over-year. One of the new customers in the quarter was a multibillion-dollar semiconductor supplier that serves several markets, including automotive, computing, consumer, energy, industrial, and medical, said Erickson.
“Including this newest customer, our last two announced customers have selected our systems primarily for applications other than electric vehicles including industrial, solar, and commuter electric trains. This further extends our application space beyond the opportunity we see in silicon carbide for traction inverters and onboard and offboard chargers for electric vehicles,” Erickson said.
For fiscal 2024, the company maintained its guidance for at least 50% revenue growth and 90% profit growth.
Stock price should continue to soar
Aehr stock is up some 39% year-to-date (YTD) to around $29 per share as of Dec. 19, but it had been trading at over $52 per share on Sept. 6. At that point, it had been up about 187% YTD, before dropping sharply in September and October. The decline really had nothing to do with the companyʻs performance, as the fiscal first quarter numbers showed.
The decline likely was tied to a few factors — the overall drop in the markets in August, September, and October; the high valuation of Aehr stock after the huge runup; and perhaps the fact that it didnʻt raise its guidance for 2024, even though it calls for 90% profit growth.
But thatʻs good news for investors because the high valuation came down to a reasonable level, trading at 42 times earnings, down from 102 times earnings at the end of August. It is still on the high side, but reasonable given the high growth expectations.
One thing to watch for is its concentration of revenue. Aehr has one major client that generates 79% of the firmʻs revenue, while the second largest client accounts for about 10%. On the first quarter earnings call, CFO Ken Spink said he expects to see three or four 10%-plus customers in 2024. Being so heavily tied to a handful of customers, with an outsized portion of revenue from just one, is something to keep an eye on, as the loss of a major customer would be a huge hit.
But Aehr Tests Systems is the leader in this market, and it has a long track record, having been around since 1977, so it should be able to grow with the space.
As a small company with a market cap of about $804 million, it doesnʻt have a lot of analyst coverage, but back in July, investment analysts at Craig-Hallum gave it a $60 price target, based on its revenue projections. That would be more than double its current price. Whether or not it grows that fast remains to be seen, but it certainly looks like it has some tailwinds for long-term growth.
References
- Aehr Test Systems competitors (Tracxn)
- Aehr Test Systems Shares Rise on Craig Hallum Price Target Boost Following Q4 Results (MarketScreener)
- Aehr Test Systems (NASDAQ:AEHR) Q4 2023 Earnings Call Transcript (Insider Monkey)
- New silicon carbide prospects emerge as market adapts to EV expansion (McKinsey & Co)
- Aehr Reports Continued Strong Revenue and Earnings for the First Quarter of Fiscal 2024 on Strength of Production Wafer Level Burn-in Products for Silicon Carbide Semiconductors (Aehr Test Systems)
- Markets – Silicon Photonics (Aehr Test Systems)
