Aehr Test Systems' (AEHR +2.99%) stock price performance in November was almost a microcosm of a broader debate around whether an artificial intelligence (AI) capital spending bubble is forming or not right now. According to data provided by S&P Global Market Intelligence, the stock declined 11.6% in November as the market decided to take what you might call an "AI breather", but is it a buying opportunity or the start of a deeper decline?
Aehr Test Systems and artificial intelligence
The company's sales have been under pressure in recent years as its previous core end market, wafer-level burn-in (WLBI) test systems for silicon carbide (SiC) chips primarily used in electric vehicles (EVs), has slowed. While EVs remain in the growth area of the auto market, their sales haven't met industry expectations, and many automakers have cut back on new-model releases.
Simply put, the new normal is targeted development of new EV models rather than the aggressive expansion-at-all-costs approach aimed at winning market share. That change took its toll on Aehr's revenue growth over the past few years.
AEHR Revenue (TTM) data by YCharts
That said, there's more than one string to Aehr's bow, and the company has been successful in building orders for its WLBI test systems for AI processors, including multiple orders from a leading hyperscaler. Naturally, these developments have excited the market about Aehr as an AI-related stock, and despite the November decline, the stock is up 52% year-to-date at the time of writing.
As for the decline in November, it largely stems from negative sentiment toward AI, specifically the debate over whether it's in a bubble. Given that the Aehr is now viewed as an AI stock, it's understandable that a decline would coincide with a sell-off in companies like Nvidia in the same month.
Is the market wrong?
But here's the thing. The negative sentiment, partly inspired by "Big Short" investor Michael Burry, isn't backed up by near-term fundamentals or anecdotal evidence. For example, Teradyne, a company that makes semiconductor test equipment, tends to be in an earlier cycle than Aehr, and recently reported stellar results driven by AI spending.
Image source: Getty Images.
Moreover, in mid-November, Aehr's CEO Gayn Erickson stated that "multiple leading companies" were "requesting benchmark evaluations for their AI processors since just our last earnings call."
Given that the last earnings presentation was in early October, this implies Aehr's AI end markets are strengthening, not weakening. Something to consider before turning negative on the investment theme.
