It's exciting times in the emerging but fast-growing silicon carbide (SiC) market supporting the growth of electric vehicles (EVs), and Aehr Test Systems (AEHR 1.50%) is cashing in. The company just reported a near-doubling in sales from the same quarter a year ago to $20.6 million (for the three months ended in August 2023).
Nevertheless, the stock has taken a header from highs reached this past summer, sliding from a high-water mark of $54 a share to about $40 as of this writing -- and it's been bouncing around plenty since the earnings update.
With such knockout quarterly results, why did Aehr stock fall, and is it time to buy the dip?
About that stock "crash"
Let's start with the stellar quarterly sales for Aehr. Along with that 93% year-over-year increase in revenue to $20.6 million, CEO Gayn Erickson and the top team reported GAAP net income per share of $0.16. That's a huge increase from just $0.02 last year, but there's a good reason why. Aehr is barely a small-cap stock, and it's only been hitting a profitable scale in the last two years, at least on a GAAP basis.
Data by YCharts.
So why the lackluster reaction from Wall Street? Aehr simply reiterated its previous guidance for full-fiscal year 2024 (the 12-month period that will end in May of next year). Previously provided guidance called for full-fiscal year revenue of "at least" $100 million, representing growth of at least 54%. GAAP net income is expected to be "at least" $28 million, implying growth of at least 90% for the bottom line.
The real sore spot here is that Aehr management used that phrase "at least" when providing its initial outlook a few months ago. Many investors were betting Erickson would rattle off even better expectations after the first-quarter fiscal year results.
Adding to the angst is that Aehr stock is already up a massive 150% in the last 12-month stretch -- which includes the recent sell-off. Even after that, shares trade for over 60 times earnings (GAAP net income), or 38 times the outlook for earnings through May 2024.
Among semiconductor manufacturing equipment companies, Aehr is putting up incredible growth as SiC chips, especially for EVs, pick up steam. However, with that incredible growth comes that incredible valuation. Aehr stock is still, even after the steep sell-off, in a league all its own among chip equipment peers as far as valuation goes.
Aehr is a cool company, but what about the stock?
The cat's out of the bag, and Aehr's prospects from the SiC market are no longer a secret. It's been turned into a story stock. To put it mildly, the present valuation only starts to make sense if you assume a near-doubling of GAAP net income both this year and next year too.
Assuming Aehr's net income doubles again to, say, $60 million, by fiscal 2025 (the period ended in May 2025), the company is valued at 18 times those forward expected earnings. Using that assumption nearly two years from now, Aehr is valued roughly in line with some of its peers in the chip equipment niche of the semiconductor industry. And mind you, some of these peers are also expected to put up impressive growth rates between now and then. Perhaps not "doubling earnings in each of the next two years" type of impressive, but still...
What I'm saying is that buying Aehr stock today still requires the belief that this will be a hypergrowth business for some time.
Of course, Erickson said on the earnings call that other customer SiC fabs outside of Onsemi (ON 2.53%) (which represented 88% of Aehr's revenue last quarter, as it has already begun to ramp up high-quality SiC chips using Aehr's equipment) need to get a move on placing orders with Aehr. The legacy automakers are expecting a significant ramp-up in their EV lineup in 2025 and 2026.
Erickson has also spoken at length about the potential for its test and burn-in equipment for silicon photonics and memory chips. Perhaps Aehr's hot streak will continue for a while, and extend beyond just the SiC and EV market.
However, bear in mind that chip equipment industry sales are highly cyclical, and not all SiC chipmakers and their automotive customers will fully utilize Aehr's test and burn-in machines. Over the next two years, there's also the risk that a competitor could come out with an alternative system.
Overall, I'm still a bit uncomfortable with Aehr's valuation. It has come down enough in recent weeks that I'll consider doing a dollar-cost average plan on this small-cap chip stock again. But given the risks and the high premium, I firmly believe investors should be very cautious about buying too much Aehr Test Systems stock right now.
