What happened
Shares of the semiconductor and wafer-testing company Aehr Test Systems (AEHR 11.88%) were rising again Monday, up 17.5% as of 11:41 a.m. EDT. Even more impressive, Aehr Testing had rallied 32% last Friday following the release of its fiscal second-quarter report last Thursday.
Today, more encouraging inflation data came out, lighting a fire under all tech stocks, and analysts might be looking through a murky first half of the year toward a stronger second half for semiconductor stocks. Furthermore, the fact that Aehr Test was significantly shorted by investors could be fueling a continued short-covering rally.
NASDAQ: AEHR
Key Data Points
So what
As of December 15, about 17% of Aehr's shares outstanding were being sold short, and about 18.6% of its public float was also shorted. That's a significant amount, so when a company that is heavily shorted reports surprisingly strong numbers, it can fuel a significant move higher over multiple days. Combine that with the fact that Aehr is a relatively small company to begin with, and you can see the type of two-day moves you are seeing here on the back of last Thursday's expectations-trouncing report.
In that report, Aehr reported 54% revenue growth and adjusted (non-GAAP) earnings per share of $0.16, well ahead of expectations. While some short-sellers might have thought results would underwhelm given the many headwinds facing the broader semiconductor industry, that appeared not to be the case.
A factor that helped Aehr was its exposure to some of the more resilient parts of the current chip market, notably silicon carbide wafer burn-in and testing equipment. Silicon carbide allows for faster charging and longer ranges for EV batteries and is therefore being developed for the exponential growth of the electric vehicle market.
Even if we are going into an economic recession, which could cause a decline in vehicle purchases in 2023, EVs are going to be making up a larger part of car sales this year, and their share of the auto market seems set to increase every year. That's perhaps why semiconductor companies exposed to power semiconductors and sensors, which are widely used in EVs, are displaying resilient growth figures in recent quarters, even as others in the memory, PC, and gaming markets see rather troublesome declines.
In addition to the nice earnings last week, today also saw some incremental positive news on inflation. The Federal Reserve released its most recent survey of inflation expectations, which it conducts every month. In December, inflation expectations for the next year fell by 0.2 percentage points to 5%, the lowest reading since July 2021.
Since expectations for inflation can factor into the price-setting and inflation numbers that actually materialize, those moderating expectations might lead to lower inflation. And as has been the equation ever since this spike in inflation began more than a year ago, moderating inflation equals good news for technology stocks and vice versa.
Now what
After its two-day surge, Aehr Test Systems doesn't look that cheap anymore at 90 times earnings and more than 12 times last quarter's annual run rate for sales. On the other hand, Aehr is a very small company, with just $14.8 million in sales and $4.5 million in adjusted net income last quarter.
Therefore, if it is able to capture a lot of the silicon carbide burn-in and testing market, the company could have a lot of growth ahead of it off a very small base. It's a name for any semiconductor or growth investor to note for further study.
