Shares of Aehr Test Systems (AEHR 1.50%) fell 17% this week through Thursday trading, according to data from S&P Global Market Intelligence.
Aehr, which makes test and burn-in systems used in the high-growth silicon carbide market, saw its shares collapse after its biggest customer gave soft guidance on its earnings call on Monday.
And when I say a big customer, I'm talking a company that comprised 88% of Aehr's sales last quarter. So there was plenty of reason for shareholders to get nervous. But is the caution justified?
As On fell, so did Aehr
Aehr's largest customer is onsemi (ON 2.53%), which reported earnings on Monday. While onsemi's revenue and earnings came in ahead of expectations, the company guided for a down quarter in the December-ending period, below analyst estimates.
In response, On's stock plunged nearly 20% on Monday, and Aehr fell even more in sympathy. Of course, Aehr's stock was likely due for a pullback. At one point this year, its stock had nearly tripled, and its P/E ratio had nearly reached 100 times earnings. After this week's plunge, Aehr still finds itself up over 18% for 2023, and its P/E ratio still stands at 38 times earnings.
Why was there such enthusiasm for Aehr in the first place? Well, Aehr has a large potential opportunity ahead of it. Aehr is a leading player in wafer-level burn-in testing systems, which are crucial for testing silicon carbide chips. SiC chips are a growing type of chip material that goes into both electric vehicles and other energy transition markets, and is supposed to see hypergrowth. In fact, some forecast the SiC market will grow at a 33% annualized rate over the next five years.
Aehr also noted that the company has not one, but six large customers for silicon carbide. However, as its revenue concentration shows, these customers aren't yet buying machines in large volumes, but are rather in the testing stages as they build up their SiC operations. Onsemi has an early lead in the SiC market with high market share, but others are coming for it as well.
Still, the electric vehicle market appears to be slowing down, as evidenced by onsemi's earnings forecast and others in the space this earnings season. Meanwhile, Aehr is a relatively small company, with just $75 million in trailing-12-month revenue and $18.6 million in net earnings, most of which is still tied to hardware sales, with little recurring services revenue. So, a slowdown in SiC demand adds questions over the near-term outlook.
But Aehr has its defenders
Even during its plunge this week, Aehr garnered some defenders among analysts. William Blair analyst Jed Dorsheimer reiterated his outperform rating on shares, calling the pullback an opportunity. Even though On's soft outlook put Aehr's annual guidance for $100 million in revenue at risk, Dorsheimer indicated silicon carbide is only one of the opportunities for Aehr, whose wafer burn-in systems could also be used for gallium nitride, memory, and silicon photonics in the future.
Investors of course have to balance that opportunity against a high multiple, along with the fact that Aehr is still a relatively small company. That adds risk on top of uncertainty and volatility. Still, for young growth investors with a high risk tolerance and diversified portfolio, this week's sell-off could make for a good entry point in the stock.
