Is It Too Late to Buy Aehr Test Systems Stock?

Aehr Test Systems' (AEHR 1.50%) stock has surged nearly 180% over the past 12 months and is still only trading a few dollars below its all-time high. The producer of chip testing systems attracted a stampede of bulls with its robust post-pandemic revenue growth, rising profits, and exposure to the expanding silicon carbide market.

Is it too late to buy this red-hot small-cap stock? Below is a review of its business model, growth rates, and valuation to help you decide.

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How rapidly is Aehr Test Systems growing?

Aehr didn't attract much attention when it went public back at $8 per share back in 1997 since it seemed like another minor producer of semiconductor testing and burn-in systems. Its shares dropped below $1 in 2009 during the Great Recession, then remained largely ignored for more than a decade.

But in early 2021, Aehr suddenly caught the attention of the bulls during the buying frenzy in growth and meme stocks. Unlike many of those hot stocks that crashed as interest rates rose over the past year, Aehr retained most of its gains.

The company's stock has soared 1,760% since the first trading day of 2021, and it's only pulled back about 12% since it closed at its all-time high of $53.69 on Aug. 1. Investors probably stuck with Aehr because they were impressed by its explosive growth in fiscal 2022 (which ended in May 2022) and its continued growth throughout fiscal 2023.

Data source: Aehr Test Systems. Chart by author.

Aehr expects its revenue to rise "over 50%" in fiscal 2024, while analysts expect 58% growth. The company mainly attributes that accelerating growth to the rapid expansion of the silicon carbide market. Silicon carbide chips can operate at higher voltages, temperatures, and frequencies than traditional silicon chips, which makes them ideal for short-length LEDs, lasers, 5G base stations, military radars, and electric vehicles (EVs).

However, only a handful of chipmakers -- most notably Wolfspeed, Infineon, Onsemi, and STMicroelectronics -- currently produce silicon carbide chips. And only a few companies like Aehr can provide the equipment to properly test and burn-in those wafers.

Therefore, the sudden land grab in silicon carbide technologies -- which is mainly being driven by the production of new EVs -- has lit a fire under Aehr's business. Its early mover's advantage in this niche market also gives it plenty of pricing power.

That's why Aehr finally turned profitable by both generally accepted accounting principles (GAAP) and non-GAAP measures in fiscal 2022. Its non-GAAP earnings per share (EPS) grew another 55% in fiscal 2023, and analysts expect 76% growth in fiscal 2024.

Beware of customer concentration and valuation issues

Aehr might seem like a great long-term play on the expansion of the silicon carbide market, which Research and Markets expects to grow at a compound annual growth rate (CAGR) of 19% from 2022 to 2030. The smaller market for silicon carbide wafers for EVs could also expand at a CAGR of 45% during the same period, according to William Blair analysts.

Silicon carbide chipmakers like Wolfspeed might seem like wobbly investments because they're aggressively ramping up their capital expenditures on new plants, but equipment makers like Aehr should profit from that higher spending. However, investors shouldn't overlook Aehr's customer concentration issues: In fiscal 2023, it generated a whopping 79% of its revenue from a single unnamed customer. Another 10% came from its second-largest customer.

In its latest 10-K filing, Aehr warned that it could face "competition from established competitors and potential new entrants, many of which have greater financial, engineering, manufacturing, and marketing resources." If one of those competitors swipes Aehr's largest customer, its entire business could collapse.

Aehr's stock also isn't cheap, relative to its near-term growth. With an enterprise value of $1.31 billion, it's valued at 13x this year's sales and 45x this year's adjusted earnings. The semiconductor equipment giant ASML, which is growing at a slower but more stable rate, trades at just 25x forward earnings.

Is it too late to buy Aehr Test Systems stock?

Aehr's stock had a good run but could have more upside potential if the silicon carbide market continues to expand at a healthy rate. That said, its customer concentration issues are troubling, and it could face a lot of competitive challenges. It's not too late to buy Aehr as a long-term play on the silicon carbide market, but it's still a highly speculative stock.