Last Thursday, Aehr Test Systems (AEHR 1.50%), which makes semiconductor test and reliability qualification equipment, released its report for the first quarter of fiscal 2024 (ended Aug. 31). Investors weren't satisfied, driving shares down 12.6% on Friday.
The reason for the stock's sell-off was investor disappointment that management didn't increase its full-year guidance. The quarter's results themselves were robust, driven primarily by demand for the company's equipment from manufacturers of silicon carbide semiconductors for use in electric vehicles (EVs). Revenue and adjusted earnings per share (EPS) soared 93% and 260%, respectively, year over year.
As I wrote in my Aehr earnings article, "Investors have very high expectations for the company's performance, as evidenced by shares surging about 119% in 2023 through Thursday's regular trading session. So, as is rather common in such cases, investors are often not satisfied with such a company merely reiterating full-year guidance, as Aehr management did."
Even with Friday's sell-off, Aehr stock is still up 84.8% in 2023 through Monday, Oct. 9. The S&P 500 and the tech-heavy Nasdaq Composite indexes have returned 14.4% and 29.7%, respectively, over this period.
Earnings releases tell only part of the story. Here are two key things management shared on Aehr's Q1 earnings call that investors should know.
Image source: Getty Images.
Green Flag: Business model generates very profitable recurring revenue
From CFO Chris Siu's remarks:
Strong demand for our WaferPaks contributed to a significant year-over-year increase in revenue in the first quarter. WaferPak and DiePak consumables revenue accounted for 55% of our total revenue in the first quarter [...]. As we have noted before, customers typically purchase our FOX systems ahead of WaferPaks and subsequently stack up purchases of WaferPaks.
First, some definitions: WaferPak Contactors are needed with Aehr's Fox systems for wafer-level test and burn-in. They contact individual die on the wafer and are custom designed for each device. As Aehr's customers win new device designs from their customers, Aehr eventually receives orders for new WaferPak Contactors to fulfill the new wins. DiePak Carriers are used with Fox systems to test and burn-in devices in individual singulated die and module form.
Consumables revenue, like systems revenue, can vary significantly quarter to quarter. For additional context, in the prior quarter (Q4 of fiscal 2023), Aehr's consumables revenue accounted for 38% of its total revenue. Over the long term, CEO Gayn Erickson said on the year-ago earnings call that, "We expect consumables to not only grow in total revenue for Aehr, but as a total percentage of our business approaching 50% of our business on an annual basis."
Businesses that generate at least some recurring revenue tend to be attractive from an investing standpoint. Making the sales of additional consumables tends to be easy. Assuming Aehr's customers are still using its test and burn-in systems, they'll likely have to buy additional consumables to use over the life of their systems.
Moreover, like most businesses that have razor-and-blade-like business models, Aehr's consumables (the "blades") are the most profitable part of its business.
Red Flag: Customer concentration risk is extremely high
From the remarks of CFO Siu when asked by a Wall Street analyst what percentage of the company's revenue did its largest customer account for in the quarter:
Number one customer is 88%. It's very high.
This percentage is even higher than in fiscal year 2023, when the largest customer accounted for 79% of Aehr's total revenue. The company's gargantuan customer concentration makes its stock extremely risky.
But good news seems to be on the horizon. For context, the company has six current customers and expects it will likely add a few more during this fiscal year. CEO Erickson had this to say on the topic:
Right now, we're right at 3 or 4 [customers who should account for at least 10% of our revenue in the current fiscal year]. ... [F]rom a diversity [standpoint], we're all excited because of how many customers [we now have], but let's not kid ourselves. We don't have hundreds of customers and never will in this space, but we'll definitely have a much more diverse number of customers.
Moreover, Erickson said that while the company doesn't provide data on how many customers account for at least 5% of its total annual revenue, it could have a "good chunk" of customers that fall into this category. Currently, he said that four or five customers were running in the 3% to 6% range.
Doing the math here, the company's largest customer currently seems poised to go from accounting for 79% of its total revenue in fiscal 2023 to roughly 50% max in fiscal 2024. A caveat: It's still very early in the fiscal year, so this percentage could change considerably.
In short, Aehr Test Systems stock is a high-risk, potentially high-reward investment. As such, only investors comfortable with high-risk stocks should consider investing in it.
