Shares of small semiconductor manufacturing equipment company Aehr Test Systems (AEHR 1.50%) -- provider of silicon carbide (SiC) test and burn-in machines used in electric vehicle parts production -- have made a stunning round trip the past few years. As auto sales, and especially EV sales, started to heat up during the pandemic, Aehr stock skyrocketed into investors' collective consciousness, owing to the critical nature of its manufacturing equipment.
But times have changed, and EV market growth is slowing, but certainly not ending, in 2024. Aehr stock is going to require some patience, but this could still actually be one of the top ways to invest in vehicle electrification.
Aehr's big problem of the moment
Aehr's specialty is in SiC semiconductor manufacturing. Compared with traditional silicon, SiC is a type of wide bandgap semiconductor. Essentially, that means devices based on this substrate can operate at a higher voltage and temperature. Those are critical characteristics needed in applications such as EVs, charging stations, and other energy grid applications.
But SiC also has a unique manufacturing process. One of the steps is known as test and burn-in. Usually before an SiC wafer is cut up into chips and packaged into an electronic device, the wafer is subject to electrica; charge to weed out bad pieces. SiC also benefits from burn-in, or extended application of electrical current, as new SiC can be unpredictable when first put in use. Think of burn-in like the process of aging wine.
As EV adoption among consumers rises, demand for SiC chips has also increased, and Aehr thus holds a critical role in the manufacturing process. The problem, though, is that in recent years, Aehr has had one customer account for the vast majority of its revenue: ON Semiconductor (ON 2.53%). Onsemi has aggressively been retrofitting some of its chip fab space to SiC production, and adding lots of Aehr equipment to facilitate its big bet.
As a result, in fiscal 2022 (the 12 months ended in May 2022), Aehr said Onsemi accounted for 82% of its sales. In fiscal 2023, Aehr didn't disclose any names but said its top customer had once again accounted for 82% of sales. And in Q1 fiscal 2024 (the quarter ended in August 2023), that large customer had swelled to 88% of sales.
Thanks to some new customer additions, it appears Onsemi fell to just 47% of Aehr's total revenue in the latest quarter that ended in November 2023, so that's good news for Aehr that it's making some headway in customer diversification.
All of this jibes with Onsemi's pace of capital expenditures over the past few years. Spending on property and equipment came to $1 billion in 2022 but jumped to $1.58 billion in 2023. After an SiC spending spree, Onsemi management just said in its latest quarterly update in early February that it will be scaling back its capital expenditures this year. It will be spending more on consumable parts for those test and burn-in machines though (which doesn't count as CapEx).
Nevertheless, Onsemi also said it sees the EV industry growth rate slowing from about 30% to 40% year over year to a 20% to 30% rate in 2024. That slower growth rate has caused a general oversupply of some parts for EV manufacturing. Many companies involved in auto manufacturing are delaying vehicle electrification expansion plans as a result, which is trickling down to a near-term headwind for Aehr.
Growing pains are all part of the process
The good news is that Aehr has been adding lots of new customers as of late. There's still ample optimism that the SiC party surrounding the EV market and other energy grid use cases will heat up again before too long.
However, Onsemi's scale-back and a general slowdown in the EV market mean Aehr is now expecting lower-than-initially forecast spending from its customers in the coming year. It previously thought revenue and GAAP net income would rise by more than 50% and 90%, respectively, in fiscal 2024. But in the latest update, revenue is now expected to rise 15% to 30% from 2023, and net income up 30% to 44%.
Growth is growth, but the valuation had clearly gotten way out of hand, especially for a cyclical industrial equipment provider like Aehr, when the stock peaked last summer and autumn. But today, the valuation looks downright reasonable at just 21 times trailing-12-month earnings per share, assuming SiC continues to pick up traction for years to come.
At this juncture, Aehr is still growing and profitable, and it holds a critical spot in the global EV manufacturing chain. This could be one of the best EV stock buys to surface in years after getting washed out from its wild run-up last autumn. I'm slowly adding to a small position in Aehr Test Systems in 2024.
