Tesla's (TSLA -3.40%) 2023 investor day presentation gave some semiconductor shareholders a scare. The company has been designing a new next-gen powertrain for its electric vehicles (EVs), one that uses 75% less silicon carbide (SiC) than before. Shares of chip design and manufacturing companies involved with SiC took a brief dip following the announcement.
The emphasis is on the word "brief," because Tesla's announcement shouldn't be viewed as bad news for the nascent SiC chip market. Aehr Test Systems (AEHR 2.22%), a top stock to bet on the development of silicon carbide, doesn't believe Tesla's 75% reduction for SiC chips means the SiC industry will suffer 75% less demand.
Why reduce SiC chips in the first place?
Silicon is the basic substrate for the majority of semiconductors -- building blocks for all things computing tech and electronic devices. But for higher-voltage applications, like in EV powertrains, silicon has its limitations. That's where silicon carbide (silicon mixed with carbon) comes in, since it can better handle higher voltages and heat.
The problem, though, is that SiC is a newer semiconductor substrate. It lacks the efficient mass manufacturing scale of silicon and is more complicated to produce SiC wafers (large round disks that eventually get chopped up into chips) than pure silicon ones. As a result, SiC is quite expensive.
Thus, as Tesla continues to look for ways to bring a more affordable EV to market (the so-called "Model 2"), constructing a more efficient powertrain is a must -- and less SiC means lower cost.
Aehr Test Systems adds some clarity to the situation
A big reduction in need for SiC at Tesla was initially taken as bad news for chip manufacturers like ON Semiconductor, STMicroelectronics, and Wolfspeed, all of which are investing to ramp up their SiC chipmaking capabilities for the EV boom.
Data by YCharts.
However, Aehr Test Systems quickly responded with a "don't panic" message. Aehr Test Systems is a small chip fab equipment maker that specializes in critical testing machines for SiC wafers and devices, making it one of the best pure plays on the nascent SiC market. It is in talks with multiple SiC chipmakers as they figure out how to profitably ramp up their operations for the EV market, as well as other growing SiC markets like renewable energy.
Aehr CEO Gayn Erickson is thus in a position to provide some clarity on SiC development. In a prepared statement shortly following Tesla's investor event, Erickson said:
Tesla clarified that the 75% reduction [in SiC] applies only to the next-generation lower-cost drive units to be included in the new model platform, which is still in development with a yet-to-be-announced initial ship date. Tesla clarified that this will not impact the current high-performance model platforms, including the Model S/X and Model 3/Y vehicles.
Erickson also noted that while the number of SiC devices in Tesla's new powertrain might be reduced by 75%, the actual size of each SiC chip in these devices is roughly 50% larger than what's currently used in Tesla's powertrains (which were originally announced back in 2017).
In other words, SiC wafer demand from the EV market remains roughly unchanged following Tesla's update. Erickson added:
Tesla further clarified that the new inverters would be made from a new Tesla-proprietary custom module package, and that Tesla would purchase the die from multiple manufacturers and package them in this Tesla-proprietary custom module.
Put simply, SiC is still an emerging growth market, and Aehr sees lots of new customers and demand for its SiC testing machines in the years ahead.
The best bet on the EV market?
Regardless of what happens in the coming years, top companies developing SiC manufacturing like ON Semi and STMicro primarily make money off of non-SiC chips. Aehr, on the other hand, is small, and its growth trajectory primarily relies on SiC's ramp-up. This could make Aehr the best way to bet on SiC, as well as the EV market overall.
However, as it goes with any emerging growth business, Aehr will be highly volatile. Revenue growth (and profitability) will come in fits and starts. Paying a reasonable price can be critical for a stock like this. As Aehr is just beginning to reach a profitable scale, shares trade for a high premium of 75 times trailing-12-month earnings, or 31 times next fiscal year's expected earnings (for Aehr's fiscal year that will begin the summer of 2023).
I have a very small position in this stock, but I'm not buying any more of it at this time. Nevertheless, as Tesla's new powertrain could help drive further EV adoption in the coming years, Aehr Test Systems stock is definitely worth keeping on your radar.
