Get ready to discover a hidden gem in the semiconductor industry - $AEHR, also known as Aehr Test Systems.
This smaller company has been making waves lately, and we're here to give you the inside scoop. Let's dive in!
Current Price: $35.85
52Wk High: $37.57
52Wk Low: $6.71
Market Cap: $893.85 M
Dividend: None
1Yr Performance: 167.89%
Continue below to see the details!
Aehr Test Systems (AEHR) is a company headquartered in Fremont, California, that provides advanced testing solutions for the semiconductor industry worldwide.
Their products are used to test and burn-in logic, optical, and memory integrated circuits, and they have over 2,500 systems installed globally.
They have developed several innovative products, including the ABTS and FOX-P families of test and burn-in systems, as well as the FOX WaferPak Aligner, FOX WaferPak Contactor, FOX DiePak Carrier, and FOX DiePak Loader.
These products are used to test and ensure the reliability of complex semiconductor devices, such as microprocessors and systems-on-a-chip. Aehr Test Systems has been in operation for over four decades and continues to provide testing solutions to meet the increasing demands of the semiconductor industry.
Investigating Aehr’s edge, leadership touched on their competitive advantage throughout the Q2 earnings call in a Q&A session exchange.
“We are significantly lower than the other folks. There are people that have $1 million per wafer cost, and we might be $200,000 in kind of one of the -- in some of the silicon carbide cases, for example. And people usually go, "Well, why are you giving them away? Well, we don't feel we're giving them away. We're pretty open with our margins with our customers,” CEO Gayn Erickson.
This includes the rapidly growing electric vehicle (EV) power chip market. In fact, during the Q2, 2023 earnings call, management noted the elevated and continuously growing demand for SiC chips.
Erickson emphasized the company's momentum in SiC wafer-level testing and burn-in and anticipates this trend to persist over the next several years.
“Our momentum in silicon carbide wafer level test and burn-in continues to grow. And we see this momentum continuing for the next several years as companies are adding significant capacity in silicon carbide semiconductors to address the incredible forecasted demand, particularly for the electric vehicle and electric vehicle charger markets,” Erickson said.
Aehr Test Systems also caters to electrification infrastructure, solar, wind, and industrial markets - all of which are increasingly adopting SiC chips. Through its targeted focus on key industries and emerging megatrends, investors believe Aehr Test Systems is poised for continued growth and success.
You may be wondering about Aehr Test Systems' exposure to SiC clientele and the future potential of this exciting technology. Upon investigation, Aehr's management revealed that two of the top four makers of SiC chips are existing customers, and the third is currently testing Aehr's systems.
In fact, Aehr's leadership team anticipates further growth opportunities with these key clients. CEO Gayn Erickson stated that these top SiC market participants plan to order a significant number of FOX-XP systems for volume production and other SiC devices worldwide, in order to meet the rapidly expanding market demand for SiC devices in the EV and industrial markets.
Not only is management encouraged by the future expectations of client demand, but leadership continues to deliver, a perfect example being a $25 million follow-on order from their largest customer announced back on January 20th.
Shortly after the announcement, upgrades followed, such as a call from analyst Christian Schwab, who took the stock price target from $31 to $45 and noted the client is believed to be On Semiconductor (ON).
William Blair research forecasts significant growth in the SiC market, with an estimated 48.8% compound annual growth rate through to 2030. They predict that the market for SiC devices and EV applications, such as traction inverters and onboard chargers, will grow from 119,000 6-inch equivalent SiC wafers for EVs in 2021 to over 4.1 million 6-inch equivalent wafers in 2030.
Similarly, Yole anticipates a significant increase in sales of SiC chips, from a modest $1.1 billion in 2022 to an impressive $6.3 billion in 2027. With such promising growth projections for SiC, Aehr Test Systems is well-positioned to capitalize on this emerging trend and continue delivering value to its customers.
Before delving into the nitty-gritty financials, it's important to introduce Aehr Test Systems' full management team. President and CEO Gayn Erickson has been leading the company since 2012, and brings with him years of experience in leadership roles at Verigy and Agilent.
The rest of the management team also boasts impressive backgrounds, with prior experience at top companies such as Applied Materials, Deloitte, Siemens Medical, Teradyne, GES, Tecan, and ChipScale.
Aehr Test Systems' board of directors is chaired by Rhea Posedel, who founded the company in 1977 and served as CEO until 2012. The board includes members with previous experience at companies such as Translarity, Intel, Merrill Lynch, PsiQuantum, Quaartz, and more.
Moving on to Aehr Test Systems' financial performance, the company reported impressive Q2 2023 results, with an EPS of $0.14 and revenue of $14.8 million, surpassing market expectations. These figures represent substantial improvements over the same period in 2022.
On the revenue front, Aehr's Q2 revenue of $14.8 million indicates a 54.15% YoY growth and a $4.1 million increase from the previous quarter. This marks the seventh consecutive quarter of revenue growth greater than 50% YoY.
Despite the remarkable revenue growth, some investors have raised concerns regarding the decelerating pace of revenue growth since 2Q of 2022 when YoY growth was a staggering 471.06%.
Expounding on the topic of revenue, it is noteworthy that Aehr's revenue streams are highly centralized in terms of product line and geography. The most recent quarter's financial report indicates that a significant 97.2% of Aehr's revenue is attributed to their wafer-level product line, while only 2.8% stems from their test during burn-in product line.
Additionally, Aehr's revenue composition is diversified across different categories, as demonstrated by the second quarter's report, where 49.9% of revenue was systems-based, 44.6% was contactors-based, and 5.5% was services-based.
Furthermore, the geographical distribution of Aehr's revenue indicates that the majority of its revenue (82.4%) is sourced from Asia, while 17.2% comes from the United States, and the remaining 2.97% is generated from Europe.
Moving on to the topic of income, it is noteworthy that Aehr achieved a net income of $3.7 million in the second quarter of 2023. This figure represents a substantial increase from the net income of $0.7 million reported during the same period in 2022.
In addition, Aehr's operating income for the quarter was $3.5 million, marking a significant improvement from the $0.7 million reported in the corresponding quarter of 2022.
While it is encouraging to see improvements in both net income and operating income, it is important to note that Aehr's income has been volatile, with negative readings and significant dips reported in the past six quarters.
Moreover, it is worth mentioning that Aehr's gross profit has shown notable improvements since 2022. In the second quarter of 2023, the gross profit totaled $7.9 million, which is considerably higher than the figure of $4.5 million reported during the same period in 2022. This represents an impressive year-over-year expansion of 75.06%.
Furthermore, gross profit in the second quarter represented 53% of sales compared to just 42% same period 2022.
With regards to the evaluation of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), Aehr achieved a Q2 EBITDA of $3.6 million, which represents a significant improvement from the $0.8 million reported during the same period in 2022.
In terms of free cash flow (FCF), it is noteworthy that this component has been somewhat unstable. The second-quarter FCF for 2023 came in at $-0.2 million, indicating a decline from the positive $3.3 million reported during the same period in 2022.
During the quarterly call, management acknowledged that operating expenses had increased by 16%.
As explained by CFO Kenneth Spink, "The increase from the preceding first quarter is primarily due to an increase in SG&A of $350,000 related to cost of growing the business, including increases in headcount and corresponding recruiting fees, increases in company-wide salaries, and increases in outside commissions, travel, entertainment, and trade shows related to our significant increase in selling activities."
Regarding the backlog, management expressed a positive outlook during the call. According to Spink, "Backlog as of November 30 was $15.5 million compared to $19.5 million at the end of the preceding first quarter and $36.1 million at the end of the second quarter last year,".
For the future, management provided guidance for full-year 2023 revenue of $60 to $70 million, representing growth of 18% to 38% year-over-year, alongside strong profit margins.
"We expect bookings to grow faster than revenues in fiscal 2023 as the ramp in demand for silicon carbide in electric vehicles increases and we build momentum going into fiscal 2024," leadership noted.
Moving on to Aehr's balance sheet, the company exhibits a sound financial standing as of the second quarter.
The total assets amounted to $67.5 million, while the total liabilities accounted for $10.9 million. The company also has $18.9 million in cash and cash equivalents, and a total debt of only $0.6 million.
Examining the balance sheet across several quarters, it is evident that Aehr has maintained a robust level of assets and cash, which has steadily risen over time. Additionally, the management team has prioritized the repayment of debt obligations.
Transitioning to valuation, Aehr's multiples have experienced an increase in various areas since the first quarter of 2022.
As of Q2 2023 (NTM):
EV/Sales: 11.1
Price/Sales: 11.5
EV/EBITDA: 43.4
Price/Earnings: 41.2
As of Q2 2023 (TTM):
EV/Sales: 14.6
Price/Sales: 15.2
EV/EBITDA: 67.8
Price/Earnings: 77.2
Price/Book: 16.3
To put this in context, the average price-to-earnings (PE) ratio for semiconductor companies over the past three years has been 26.4 times, while the average price-to-sales (PS) ratio has been 5.5 times according to SimplyWallSt. With these averages in mind, Aehr's current valuation multiples appear to be mostly above industry norms.
Moving on to the assessment of management effectiveness, Aehr's leadership has demonstrated an intriguing track record.
Return on Assets: 19.65%
Return on Equity: 25.33%
Return on Invested Capital: 25.09%
Based on the aforementioned information, Aehr's management has exhibited the ability to reinvest earnings more efficiently than 91% of its competitors in the semiconductor industry.
Examining market sentiment through a quantifiable approach, as of February 28th, the Total Market Sentiment based on ChatterQuant data showed a positive skew of 45%, negative skew of 16%, and neutral skew of 39%. In addition, the discussion activity has witnessed a remarkable increase of 153.85% over the past month.
Moving on to the bullish and bearish arguments, those with a bearish view think that Aehr, being a smaller company, may not be able to fully capitalize on the growth opportunities presented by the industry trends. They also believe that the company is overvalued and heavily reliant on a few products and sources of revenue.
To be fair, the bears do have some valid points. For instance, in 2021, when the semiconductor industry was experiencing significant revenue growth, Aehr's revenue declined by 27% compared to the previous year.
On the other hand, the bulls are optimistic about Aehr's future prospects by emphasizing the company's testing expertise, increasing demand driven by the electric vehicle (EV) boom, and management's impressive record of generating strong revenue growth in recent quarters.
From a technical perspective, Aehr's stock price closed at $33.35 on Tuesday, retreating from its earlier peak of $37.57. Additionally, the daily moving average convergence divergence (MACD) momentum indicator closed lower and was weakening, while the relative strength index (RSI) remained neutral at 53.4.
Regarding significant price levels, Aehr's stock faces strong resistance near the $37 high, while potential support levels are situated below at $29.7, $27, $24.7, and $22.
In summary, Aehr Test Systems (AEHR) is a promising small-scale semiconductor company that possesses both favorable and unfavorable characteristics. The company is subject to various macro trends and the growing adoption of advanced technologies such as SiC.
Now we will leave it to you to judge, debate between the bulls and bears, and invest as you see fit. Until the next one, eat, sleep, profit, and trade on!
Read more by Luke Donay and Donay Capital through the link below!
Disclosure: This is not direct financial advice, simply an opinion based on independent research.
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