Aehr Test Systems was clobbered by the electric vehicle sales outlook, but it could be gearing up for significant customer diversification.
As interest rates increased and made the purchase of new vehicles more prohibitive in the last year, companies specializing in electric vehicles (EVs) have taken it on the chin in recent months. That includes tiny Aehr Test Systems (AEHR 1.21%), a specialist that makes equipment used in production of silicon carbide (SiC) chips for high-voltage power devices — including in EV motors and EV charging stations.
Much has already been said about the outlook for EVs, which may just be going through some growing pains. Aehr itself predicts a rebound in sales in the current quarter (spring 2024). However, in the next couple of years, a new growth market may emerge for the tiny company: artificial intelligence (AI) systems.
A miss on earnings, but the future potential is still there
Aehr just whiffed on its third-quarter fiscal 2024 (the three months ended in January 2024) earnings report. Customers pushed back delivery of SiC test and burn-in equipment until later this year due to current excess supply of chips for the auto industry. Aehr’s test equipment helps weed out bad SiC chips. The machines also do burn-in, which “ages” the SiC chips by running electric current through them for a fixed period of time — a necessary step unique to SiC that helps with performance of these high-power devices once they get installed into EVs.
The company previously anticipated $75 million to $85 million in revenue in fiscal 2024 but lowered its guidance to at least $65 million. That’s roughly in line with sales in fiscal 2023, as top customers like Onsemi lap the heavy spending they did on Aehr equipment the last couple of years in preparation for their SiC chip production.
The good news for Aehr is that it appears it will remain profitable even during the EV downturn. It expects generally accepted accounting principles (GAAP) net income to be at least $11 million for fiscal 2024.
Data by YCharts.
Aehr has been working to diversify its customer base. The current auto industry volatility put a damper on some of that progress. However, AI could do much to help Aehr supercharge these efforts. I wrote about the promise of silicon photonics for Aehr in early 2023, as companies like Nvidia, Advanced Micro Devices, Intel, Taiwan Semiconductor Manufacturing, and others work on incorporating this technology into their designs and manufacturing capabilities.
What does photonics have to do with AI?
To be clear, there’s no timeline for when exactly silicon photonics will be a viable market for Aehr’s equipment. However, as AI systems will consume more data and power, tiny silicon photonics (which utilize lasers to speed up data transmission between chips) could help solve data bottlenecks in these complex devices.
Aehr CEO Gayn Erickson has explained that the testing of photonics in AI chips could be a big market for Aehr at some point in the not-so-distant future. Erickson said on the last earnings call that six customers are using Aehr equipment for test production of photonics in AI devices.
Just like SiC power chips, bad photonics chips need to be weeded out of the manufacturing process. Burn-in also helps stabilize these devices before final installation in an AI system. Aehr could be sitting on another growth outlet.
Small company, small bets for investors
At this juncture, Aehr is still in need of an uptick in the global EV industry if shares are to get back on track. Nevertheless, the business has shown it has potential optionality, as its machines used in semiconductor manufacturing could be more than an EV one-hit wonder.
Shares trade for about 20 times trailing 12-month earnings per share, a metric poised to get worse before it gets better, given the dip in sales to SiC chip customers. Small-cap stocks are hard, and wild swings in stock price are the norm. Keep any bet small on this business. However, I’m happy to keep my small position to see how this story plays out.
Nicholas Rossolillo and his clients have positions in Advanced Micro Devices, Aehr Test Systems, Nvidia, and ON Semiconductor. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and ON Semiconductor and recommends the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
