Is Aehr Test Systems Stock a Buy Now?

Aehr Test Systems' (AEHR 1.50%) stock tumbled 13% on Oct. 6 after the semiconductor-testing-equipment maker posted its latest earnings report. For the first quarter of its fiscal 2024, which ended on Aug. 31, revenue jumped 93% year over year to $20.6 million and exceeded analysts' expectations by $1.4 million. The company also quadrupled its adjusted net income from $1.3 million to $5.2 million, or $0.18 per share, clearing the consensus forecast by two cents.

Aehr's growth rates were impressive, but its shares might have been due for a breather. Even after its latest post-earnings drop, the stock remains up nearly 180% over the past 12 months. It also still doesn't look like a bargain at 37 times forward earnings and 10 times this year's sales. So, is it the right time to start a new position in Aehr?

Image source: Getty Images.

Carving out a niche in a growing market

Aehr didn't attract much attention when it went public 26 years ago, and its stock price dipped below $1 during the depths of the Great Recession in 2009. To most investors, Aehr merely seemed like a tiny producer of semiconductor test equipment.

But over the past few years, the company has quietly carved out its own niche with its production of testing and burn-in equipment for silicon carbide wafers. Only a few chipmakers -- including Wolfspeed, Infineon, Onsemi, and STMicroelectronics -- currently produce silicon carbide chips.

Silicon carbide chips can run at higher voltages, temperatures, and frequencies than traditional silicon chips. That resilience makes them ideal for short-length LEDs, lasers, 5G base stations, military radars, and electric vehicles. According to Research and Markets, the global silicon carbide market could expand at a compound annual growth rate (CAGR) of 19% from 2022 to 2030 -- and only a handful of companies like Aehr currently produce the equipment for testing and burning in those chips.

Why the bulls fell in love with Aehr

That's why Aehr's revenue growth abruptly accelerated in fiscal 2022 and 2023. It also turned profitable by both generally accepted accounting principles (GAAP) and non-GAAP measures in fiscal 2022, and its GAAP net income rose 54% in fiscal 2023.

Data source: Aehr Test Systems.

Aehr expects its revenue and GAAP net income to rise by "at least" 50% and 90%, respectively, in fiscal 2024. Analysts expect its revenue and adjusted EPS to rise 58% and 76%, respectively, for the full year. The bulls will argue that Aehr's valuations -- while elevated -- don't seem terribly expensive relative to those growth rates.

Meanwhile, the company's backlog grew 14% year over year to $22.3 million at the end of the first quarter, which indicates there's still plenty of pent-up demand for its silicon carbide testing equipment. It held $51 million in cash and equivalents, which was more than double its $25.4 million in total liabilities, and it still has a low debt-to-equity ratio of 0.3.

With a low enterprise value of $1.1 billion, Aehr also seems like an ideal takeover target for Wolfspeed, Infineon, Onsemi, or STMicro. Any of those chipmakers could save a lot of money by expanding their in-house testing and burn-in capabilities.

Why the bears aren't convinced

Aehr's fundamentals look strong, but its insiders still sold more than four times as many shares as they bought over the past three months. Nearly 17% of its shares were also being shorted as of Sept. 14.

The bears believe Aehr will run out of steam for three reasons. First, it has severe customer concentration issues -- it generated 79% of its revenue from a single customer in fiscal 2023, while another 10% came from its second-largest customer. If its top customer abruptly reins in its spending, Aehr's sales could drop off a cliff.

Second, recent growth of the silicon carbide market was heavily driven by EVs. As the macro headwinds curb the market's appetite for new EVs -- which can already be seen in the margin-crushing price war across the EV sector -- the silicon carbide market could cool off. We've already seen evidence of that slowdown in Wolfspeed's latest numbers.

Lastly, Aehr will likely face tougher competition from both newcomers and larger semiconductor equipment testing companies as the silicon carbide market expands. One of those rivals might unexpectedly lure away Aehr's largest customer.

Is it the right time to buy Aehr?

Aehr might seem like a promising small-cap growth stock, but its customer concentration issues, murky moat, insider sales, and premium valuations are all preventing me from pulling the trigger. So, for now, investors should stick with bigger and better-diversified semiconductor plays.