Aehr Test Systems Stock May Be Ahead Of Itself (NASDAQ:AEHR)

Aehr Test Systems (NASDAQ:AEHR) has come back to life in July. AEHR went through a long slide that saw it lose most of its value, but it is now in the midst of a huge rally that has seen the stock appreciate by more than half in one month. The rally benefited from Congressional action and it got an additional boost with the release of the Q4 report on July 19, which sent the stock soaring the day after. Sentiment towards AEHR has obviously undergone changes, judging by the recent price action. Still, not everyone is likely to want in on the action. Why will be covered next.

July has been quite the change for AEHR

The stock is currently down 53% YTD and that’s with a huge rally in the month of July. The stock was down as much as 71% at the start of July with most of the losses coming in January. The slide in the stock continued throughout the first half of the year. The chart below shows how the stock fell off a cliff in 2022.

However, the stock has gained 65% in the last four weeks or so after hitting the low of the year on July 1. In doing so, the stock has overtaken the 20-day moving average and the 50-day moving average, a bullish signal. Most of the recent gains came on July 20, the day after the release of the Q4 report when the stock jumped by 28.7% in one day.

The stock tried to keep rallying, but it was unable to keep going, causing it to lose some of the recent gains in the last two days. It’s worth noting that the stock came close to touching the 200-day moving average on an intraday basis, but it failed to get over the hump. The fact that the stock has made huge gains in recent weeks and is now overbought likely contributed to the stock needing to take a breather.

Why the market liked the Q4 report so much

The recent rally coincided with efforts by the U.S. Congress to pass the Chips Act, which seeks to boost semiconductor manufacturing in the U.S. AEHR is a U.S. based supplier of test systems for burning-in and testing of logic, optical and memory integrated circuits. A huge increase in U.S. manufacturing is seen as a plus for AEHR, which explains why the market has been bidding up the price of the stock in recent weeks.

However, the rally would probably not have gotten as far as it did without the assistance of some pretty eye-popping numbers in the most recent earnings report. For instance, Q4 revenue increased by 165.6% YoY to $20.3M, a record high. GAAP EPS increased by 900% YoY to $0.20 and non-GAAP EPS increased by 475% YoY to $0.23. Note that Q3 FY2022 incurred a $1M charge related to inventory, which lowered gross margins and earnings in terms of GAAP, skewing the QoQ comparisons. The table below shows the numbers for Q4 FY2022.

(GAAP)	Q4 FY2022	Q3 FY2022	Q4 FY2021	QoQ	YoY
Net sales	$20.289M	$15.283M	$7.638M	32.76%	165.63%
Gross margin	51.6%	41.9%	46.3%	970bps	530bps
Income (loss) from operations	$5.820M	$2.256M	$0.601M	157.98%	868.39%
Net income (loss)	$5.794M	$2.243M	$0.567M	158.31%	921.87%
EPS	$0.20	$0.08	$0.02	150.00%	900.00%
(Non-GAAP)
Net income (loss)	$6.515M	$4.149M	$0.930M	57.03%	600.54%
EPS	$0.23	$0.14	$0.04	65.29%	475.00%

Source: AEHR

If the Q4 numbers are available, then so too are the numbers for the whole year. FY2022 revenue increased by 206.2% YoY to a record $50.8M. Growth was driven by demand for wafer-level test and burn-in solutions, especially for wafer-level stress and stabilization of silicon carbide or SiC devices for electrical vehicles or EVs.

AEHR erased the losses from a year ago by finishing FY2022 with net income of $9.4M or $0.34 per share in terms of GAAP or $11.7M or $0.42 per share in terms of non-GAAP. Gross margin improved by more than 10 percentage points. Bookings hit a record $60.2M in FY2022. AEHR ended FY2022 with $31.5M in cash and no debt.

(GAAP)	FY2022	FY2021	YoY
Net sales	$50.829M	$16.600M	206.20%
Gross margin	46.6%	36.3%	1030bps
Income (loss) from operations	$7.800M	($4.182M)	–
Net income (loss)	$9.450M	($2.027M)	–
EPS	$0.34	($0.09)	–
(Non-GAAP)
Net income (loss)	$11.706M	($3.151M)	–
EPS	$0.42	($0.13)	–

Guidance calls for FY2023 revenue of $60-70M, an increase of 27.9% YoY at the midpoint. From the Q4 earnings call:

“Now turning to our outlook for coming fiscal year, for our fiscal 2023 year ending May 31, 2023, we expect full year total revenue to be at least 60 million to 70 million, with a strong profit margin similar to last year. We also expect bookings to grow faster than revenues in fiscal 2023 as the ramp in demand for silicon carbide and electric vehicles increases exponentially throughout the decade.”

A transcript of the Q4 FY2022 earnings call can be found here.

Some might argue the forecast looks soft, especially in comparison to what AEHR achieved in FY2022. It’s also worth noting that roughly 80-82% of sales can be attributed to just one customer, which could be seen as a flaw in the AEHR’s growth story. While not explicitly mentioned, this customer is thought to be ON Semiconductor (ON).

“we have been approached by several more silicon carbide suppliers to evaluate our FOX-XP systems to meet their production needs for traction inverters and onboard chargers for electric vehicles, and also for other applications such as electric commuter train engine controllers, photovoltaic power conversion, and other industrial applications.

As a result of all these positive evaluations, we believe that we will receive orders from at least several new silicon carbide customers and begin shipping systems to meet their production capacity by the end of our current fiscal year that ends May 31, 2023.”

On the other hand, management expressed confidence AEHR would be able to sign up additional customers in the not too distant future due to the pressing need for SiC in the market for EVs.

AEHR is not cheap

It’s important that AEHR maintains its fast growth since the stock is not exactly cheap. The table below shows the multiples for AEHR. Current valuations can be justified if it maintains a pace of growth similar or close to that seen in FY2022, but not if it is closer to that seen in prior years when growth was on the sluggish side. Keep in mind that AEHR has yet to establish a good track record when it comes to sustained growth. FY2022 was an outstanding year, but more like the exception than the norm.

	AEHR
Market cap	$308.80M
Enterprise value	$278.33M
Revenue (“ttm”)	$50.8M
EBITDA	$8.1M
Trailing P/E	33.74
Forward P/E	N/A
PEG ratio	N/A
P/S	5.87
P/B	6.07
EV/sales	5.87
Trailing EV/EBITDA	34.36
Forward EV/EBITDA	N/A

Source: SeekingAlpha

Investor takeaways

AEHR had an outstanding year in FY2022. Sales and profits made huge strides, giving the bulls much to look forward to. At the same time, FY2023 guidance was on the soft side. The fact that growth was basically powered by one customer may not necessarily be a problem in the short term, but it is definitely something that needs to be improved.

AEHR believes it will be able to rope in new customers in FY2023 and in the following years thanks to industry growth. Some industry forecasts predict SiC output will need to reach four million 6-inch equivalent wafers by 2030 to satisfy the EV market, up from just 150,000 in 2022. On paper, AEHR should be able to take advantage of such a rapid expansion.

However, there’s always a risk in making predictions about the future. While FY2022 was a great year and AEHR looks to have good prospects thanks to SiC and EVs, it was also an atypical year compared to the past. There are no guarantees as to what might happen in the future. For instance, while SiC is widely perceived as a shoo-in in terms of the EV market, there are question marks as to whether that is such a sure thing.

Some even go so far as to argue that SiC is not mature enough for wholesale adoption in applications where lives are at risk. There are questions as to how SiC devices will hold up under strenuous conditions in the long run, especially in light of recent recalls at Tesla (TSLA), an early adopter of SiC in EVS and arguably the driving force behind SiC adoption, due to problems thought to be semiconductor-related with the inverter likely to be involved.

SiC is known to be a material prone to defects and it would not be wise to dismiss the possibility of SiC not being reliable enough at this junction for long-term use in passenger vehicles. SiC MOSFETs are fairly new and have yet to establish a long-term safety record, unlike their Si counterparts that have been used for many decades and are therefore a known product in terms of how they behave over many years under stress.

Long AEHR makes for a compelling case, but I am neutral on AEHR. AEHR has lots of potential, but it also comes with a number of ifs. AEHR is a buy if everything works out the way it thinks it will. For instance, SiC market demand has to take off as predicted and the competition is unable to come up with a product that matches what AEHR can do. Nothing major should go wrong in the coming years, which may be too much to ask for.

If somehow SiC for EV use does not quite live up to expectations, then AEHR has a problem, especially with valuations where they are. AEHR could be ahead of itself in terms of what it is expected to receive from SiC compared to what it has actually received from SiC. The forecast still calls for just $60-70M in FY2023 sales, mostly due to one customer. AEHR is very much a one-trick pony right now.

It’s also worth pointing out that SiC is not absolutely needed in EVs. SIC makes for a great addition to EVs with real benefits, but it’s not as if EVs can’t be built without the use of SiC. Not using SiC in an EV does not automatically imply an inferior product, provided the manufacturer can make up for it with improvements elsewhere.

Improvements in battery technology by companies like CATL, for instance, is currently in the fast lane and could be much more of a gamechanger than switching from IGBTs to SiC MOSFETs. In other words, it’s possible for EVs with IGBTs to outperform EVs with SiC MOSFETs if the former are equipped with up-to-date battery packs and the latter come with more dated designs. SiC is important, but not that important.

AEHR is bought mostly for what it could be someday and not so much for what it is right now, which is mostly potential that has yet to be realized. Some might be confident about what the future will bring for AEHR, but others may not. If someone falls into the former, then AEHR is worth buying. If someone is more uncertain about the future, then AEHR may have more convincing to do to get them onboard.