Aehr Test Systems: New Buy-After-Sell Opportunity After Q2 (NASDAQ: AEHR)
Aehr Test Systems (AEHR) has had a huge run since we bought shares at $2 last year for our market portfolio (and sold part of that position at $17.40 a month ago or two), but this race has met with considerable resistance over the past two months.
While we still see a great future for the company, it may have grown a bit too fast too soon, so it’s a natural consolidation prospect, and investors with a position needn’t despair.
The likely reason the stock plunged after strong second quarter results and even better CC was that management argued that it would add several new silicon carbide customers that would go into production by next fiscal year, but this needed some clarification (Q2CC):
But I wouldn’t say we expect multiple companies to go into production by May. I intended to involve by the next or during the next fiscal year, so by next May.
So while revenue and orders are growing explosively, they are not growing as explosively. However, the fundamental story is very good, composed of the following elements:
- SiC (silicon carbide) is becoming the norm in powertrain conversion and traction inverters in EVs and EV charger infrastructure (and a few other sectors).
- Case-level sample testing is sub-optimal, these power chips require 100% burn-in testing and with FOX-XP machines it’s much cheaper and faster.
- A similar story applies to the silicon photonics market and both of these markets are growing rapidly, with future demand rapidly eclipsing existing testing capacity.
- The company has an attractive razor and blade business model with supplies accounting for more than half of third-quarter revenue.
- Revenues and orders are growing at triple digit rates.
Wafer level testing
The FOX-XP can test 18 wafers simultaneously, and wafer-level testing scales better than box-level testing. From Q2CC:
A critical manufacturing step is a stabilization step where energy is used by applying high temperatures and electrical energy to unlock the optical lasers and stabilize their output power. Aehr is able to perform this critical step while the devices are still in wafer form
This is particularly relevant for industries where 100% uptime is essential, so you need 100% testing (rather than sampling), such as electric vehicles, electric vehicle charging stations, alternative energy using SiC connections and data centers, and 5G using Silicon Photonics.
The installed base of package test equipment may seem like a problem, but there will be so much growth in EVs and EV charging that current capacity is 2% of what is needed, primarily providing opportunities for building, also due to new entrants (Q2CC):
Every company we spoke to said they were getting into wafer-level lapping.
The SiC market will be huge
The SiC (Silicon Carbide) Market is set to grow at a CAGR of 30%+ over the next decade. SiC is becoming the standard for EV powertrain conversion and traction inverters and battery chargers with Tesla (NASDAQ: TSLA) leading the way, first with the Model 3, now with their full range.
Electric vehicles require one traction inverter (DC to AC) per motor, using 48 SiC MOSFETs. A typical 6 inch wafer can produce 500 (at 100% efficiency, which is unrealistic), so the yield per wafer is about 10 motors.
However, new electric vehicles use two motors, if this trend becomes widespread, it will be 5 cars per wafer.
Wafer testing with the FOX-XP is cheaper and more scalable than box-level testing, as 16 wafers can be tested in parallel and also take up much less space (see previous CC).
FOX-NP can test two slices at a time, FOX-XP 16 slices. For every million cars you need 8 Fox systems and WaferPaks at around $4 million, or $32 million for 1 million cars.
Canaccord Genuity estimates for the SiC market show that electric vehicles alone (traction inverters, on-board chargers) will require 4 million equivalent 6-inch wafers to meet demand in 2030, more than 25 times the current capacity of slices (which is 150,000).
Another 4 million chips on top of that by 2030 for electrification infrastructure, industrial electrical appliances and photovoltaics. This year, the entire market is expected to ship less than 150,000 wafers.
Orders and new customers
This is the most important question for the short-term outlook for stock prices. Their top EV customer (a major automotive semiconductor supplier, but the #4 in the industry and not even half of the #3 company) ordered an additional $19.4 million for FOX-XP systems and a $7.6 million order for WaferPaks (consumables), and that’s not even enough, so management expects this company to follow with more orders.
While this primary customer dominates his revenue at the moment, he engages with additional potential customers (Q2CC):
One of today’s leading silicon carbide vendors has switched to wafer evaluation and benchmarking of Aehr’s FOX-XP multi-wafer system to test and bring their silicon carbide wafers.
We ask Aehr to do more tests so they work with them. The question is when new customers will come on board. They will likely do this by starting with just one review machine and it will take them six months before ordering more. The sales process is long, around 9 months.
The company basically talks to all players and many new SiC players, especially Chinese, are joining the new sites. Management expects (Q2CC):
That we will be adding several new silicon carbide customers that will go into production with our solution by next fiscal year
But after some CC talk, it turns out to be May 2023 (i.e. the next fiscal year), which could be the main reason why stocks fell 20%, although that may well be earlier, maybe even this year exercise.
They increase the capacity of systems and WaferPaks, which they can do with remarkably low capital expenditure, thus pushing gross margins towards 50%. Good news is that the company does not have supply chain issues, although it does face higher shipping costs.
According to Yole’s research, the silicon photonic transceiver market alone will grow at a CAGR of 25% from 2021 to 2026, reaching $4.6 billion in 2026. Management estimates that (Q2CC):
the market for silicon photonics will expand beyond being used only for fiber optic transceiver photonic ICs, and will begin to be used in high-end processor applications and intra-network communications. chip, as well as in internal chips over the next few years.
The company has received an order for six additional FOX-NP wafer-level test and burn-in systems from its current customer, who is also expected to add new sets of wafer contactor WaferPaks to these systems and continue to increase capacity from the future.
Several other customers also anticipate additional capacity requirements for FOX systems (as well as WaferPaks or DiePaks) over the next 12 months. They don’t really have a good grip on potential revenue in 2-3 years at this point.
Other market opportunities are present (like lidar, sensors), but they are considerably smaller as they can perform sample testing, rather than 100% run-in testing (Q2CC):
But if you’re just sampling and not trying to age it, you can do it for several hours, and certainly not 24 hours. But if you’re only sampling a few percent, then all of a sudden the market size isn’t that big anymore.
- Q2 revenue at $9.6m (+470% y/y, +70% q/q)
- WaferPak and DiePak sales accounted for 53% or $5.1 million of revenue in the second quarter, bolstering the razors and blades business model.
- Gross margin increased from 41% in the first quarter to 47% in the second quarter, mainly due to better capacity utilization, their installations are progressing very well.
- OpEx was $3.8M (with R&D at $1.3M and SG&A at $2.5M) up 16% from the first quarter.
- Non-GAAP net income was $1.4 million (EPS of $0.05), excluding the cancellation of the PPP loan of $1.7 million and stock-based compensation of $718,000.
- The company completed a $24m financing (1.7m shares at $14.73).
- Operating cash flow in the first half was $5.2 million.
- Bookings from $20.7M in Q1 to $29.1M in Q2.
- Backlog was $36.1 million at the end of the second quarter (November 30).
- FY2022 Guidance: $50M+ with GAAP Net Income of $10.5M+
With estimated revenue of $50 million in fiscal 2022 (ending May) and 26.5 million shares and 2.5 million additional performance, the options give a market capitalization of approximately 440 million and an EV of $405 million, so the stock isn’t cheap yet, but that’s hardly a surprise.
On an earnings basis, things are looking a little better, with estimates for FY2022 at EPS of $0.43 rising to $0.69 next FY, giving it a forward p/e of 23 in the latter case.
This has all the hallmarks of a winning company with a significant competitive advantage in the early innings of multiple huge growth opportunities, but the speed at which these translate into new production size orders might be a little slower. than what investors valued not too long ago.
As it is difficult to time these issues, we advise you to shop around and start adding when the stock drops below $15. In a bad market, it could fall further, but these things are difficult to predict, let alone with accuracy, timing, or consistency.