Semiconductor stocks are off to the races so far in 2023. The iShares Semiconductor ETF (NASDAQ: SOXX) is up 28% year to date, compared to a 17% advance for the Nasdaq Composite index, as the chip industry has been showing signs that its cyclical downturn has bottomed and the next bull market is getting ready to gear up.
Then there's tiny Aehr Test Systems (AEHR 1.50%). It's up well over 50% so far in 2023, including a sizable pullback from highs following the most recent quarterly update (for the three months ended in February). Aehr stock is a fantastic proxy for the advance of electric vehicle (EV) technology. But investors were hoping for a dramatic upgrade to the current-year financial outlook, which management did not provide. Is it time to buy the recent dip in Aehr Test Systems stock?
A "hot" new semiconductor material
Aehr provides testing and "burn-in" equipment for silicon carbide (SiC), a newer type of semiconductor material that can conduct higher voltages and withstand higher heat. It's ideal in the powertrains of EVs -- especially the electric motor and electric charging equipment to and from the battery. Indeed, Tesla's inclusion of SiC chips in the Model 3 a number of years ago helped put SiC on the map.
Aehr is a sort of pure play on SiC (and to a lesser degree, gallium nitride (GaN) chips used in high-voltage 5G mobile network and radar modules) via its chip equipment that tests and matures chips before they go into mission-critical vehicles. And it's been growing quite fast. Through the first nine months of its 2023 fiscal year (which will end in May), revenue and earnings per share (EPS) are up a respective 40% and 123% from the year prior.
Aehr's leading customer, On Semiconductor, has been placing lots of orders for new test equipment as it ramps up production of SiC. A second customer is also ramping up SiC production and placing new orders with Aehr. I believe that second customer could be Microchip Technology or Infineon, but really, all sorts of chipmakers are experimenting with or already producing SiC components these days (STMicroelectronics is Tesla's aforementioned supplier, others include Allegro Microsystems, and Wolfspeed). There are likely to be multiple winners, and Aehr could benefit from them all.
So why did Aehr stock fall following the recent quarterly update? Management merely reiterated the same financial guidance it's been providing all year, specifically, for revenue to be in a range of $60 million to $70 million (or up 17% to 30%). Given all the activity happening in SiC these days, many investors must have been hoping for an increase in this guidance.
Given how much the stock has run up in recent months, some shareholders must have booked some profit.
Be wary of chasing top performers
The EV market and related renewable energy infrastructure is booming. As a result, SiC (as well as GaN) chip technology seems to be getting tossed around the investment community like the cloud and software as a service did during the early days of the software boom of the 2010s. This makes me a bit nervous.
After surging over 200% in the last 12-month stretch, Aehr Test Systems stock is expensive. Shares trade for 63 times trailing-12-month EPS. Aehr is a very small business, but growing fast and scaling up its profitability. But there's risk in paying up too much for future growth. After all, the semiconductor industry is manufacturing, so it's cyclical in nature. Eventually, booming chip manufacturing equipment sales will slump. It's hard to predict when that might happen for Aehr.
Granted, Aehr CEO Gayn Erickson talked about the more than a dozen chip manufacturing companies he's talked with the last couple of months, and how strong they indicate demand is for SiC due to EVs and other energy projects. Further down the road, Aehr could also benefit from adoption of silicon photonics within individual chips used in high-performance compute applications like data centers. As good as the story is right now, though, Aehr will eventually hit a temporary slump.
Don't get me wrong, I think Aehr's future is promising. I still own some shares. But for investors looking for a way to bet on EV technology -- and specifically SiC chips used in EVs -- know that Aehr is an emerging growth company. It will be an incredibly volatile stock. Aehr also carries a very high premium valuation. If you decide to buy, keep those purchases prudent, and consider buying using a dollar-cost averaging plan and building up a position in this stock over time.
