Aehr Test Systems Stock: Huge Silicon Carbide Opportunity Ahead (NASDAQ:AEHR)

Jun 03, 2023

kynny

I have received multiple requests from members of Outperforming the Market about my thoughts on Aehr Test Systems (NASDAQ:AEHR).

As such, this article will provide you with the fundamental research you need to understand what the company does, where it is today, and what its market opportunities and differentiation factors are.

Last year was a record year for the company.

In FY2022, Aehr achieved $51 million in revenues, which is not only the highest ever recorded, but also three times higher than the prior fiscal year.

With this huge increase in revenue, there was strong operating leverage that flowed to the profit level as Aehr delivered $9.5 million in FY2022, representing 19% net profit margins for the company.

Bookings for FY2022 also reached a record of $60 million.

The record momentum in revenue and bookings are driven by very strong demand from the silicon carbide market as a result of electric vehicles. On top of that, there was also higher demand for Aehr's wafer level test and burn-in solutions.

In FY2022, this year was the start of the strong growth in demand for silicon carbide in electric vehicles expected to continue through the decade. Aehr expects to have multiple new customers place orders in FY2023.

Why silicon carbide?

Silicon carbide power semiconductors are becoming the preferred technology to be used for conversion of electric power and to control electric engines, as well as for electric vehicle battery chargers that are on-board or off-board.

The silicon carbide market is expected to grow at around a CAGR of 13% until 2030 for the automotive market and the global silicon carbide market is expected to grow at around a CAGR of 12% until 2030.

According Canaccord Genuity, wafer capacity is expected to grow from 150,000 6-inch wafers in 2021 to more than four million by 2030 for the electric vehicle market. This represents 25 times growth for the electric vehicle market alone. In addition, it is expected that there will be another four million 6-inch equivalent wafers for other markets like industrial and solar markets.

Simply put, most of the industry use package or module burn-in to reduce infant mortality in high value parts.

While this was not a problem for standard silicon-based devices and IGBT as burn-in times are shorter, the costs really started to become significant with silicon carbide as a result of a longer burn-in time required.

Thus, Aehr's unique and innovative approach adds value because they make tools that test at the wafer level. Silicon carbide semiconductor companies can have immense cost savings when they use wafer level burn-in, compared to package or module part burn-in. As a result, it is cost effective for these silicon carbide companies use Aehr.

Difference between module/package part burn-in and wafer level burn-in (Aehr Test Systems)

Aehr's key product for wafer-level burn-in tests is the FOX-XP tool.

Each wafer can contain as many as a thousand silicon carbide devices and the FOX-XP can test 9 to 18 wafers each time. It costs $2.5 million each and looks and seems like an oven.

However, this must be used with its WaferPak Contactor. WaferPaks are deemed to be a consumable and provides recurring revenues to Aehr. This is because they are unique to each design and designs change every few years to improve efficiency and lower costs of end products.

As wafer level tests and burn-ins become the industry standard, I expect that Aehr's products and solutions will continue to see strong growth as we see more production release and production ramps of new electric vehicles.

In addition, the company expects their consumables business to gradually form 50% of annual revenues, and in FY2022, the consumables business already made up 45% of its business, which includes its consumable WaferPak Contactors and DiePak Carriers.

Aehr key products and solutions (Aehr)

Aehr stated that it has a strong backlog from its lead silicon carbide customer.

ON Semiconductors (ON) is Aehr's first customer in silicon carbide, with engagements with other large players like Wolfspeed (WOLF), ST Microelectronics, Infineon (OTCQX:IFNNY), and CR Micro, amongst others.

In its recent FY3Q23 quarter, Aehr stated that its lead silicon carbide customer continues to ramp up production and use of its FOX-XP production systems and WaferPak Contactors. There was a $25 million order for a significant number of additional FOX-XP wafer level test and burn-in systems, which are expected to be shipped in the next half a year to meet their growing silicon carbide capacity.

Also, Aehr said its second major silicon carbide semiconductor customer bought their first FOX-XP systems to be used for production test and burn-in other silicon carbide wafers, along with a follow-on order for its WaferPak Contactors. Lastly, this customer is expected to purchase "a large number" of FOX-XP systems to meet their publicly known plans to increase capacity significantly until the end of the decade.

In addition, it is engaged with discussions with multiple other major silicon carbide suppliers. Most of these evaluations with potential customers are going well, with two of the top four silicon carbide suppliers in the mix. With the company engaging in multiple discussions with potential new silicon carbide customers, I expect that we will continue to see strong momentum from these potential customers.

In total, there has been four silicon carbide customers announced so far and the company expects production orders from all four of them in FY2023.

Despite the current market leadership of Aehr's FOX products, the company continues to make progress in the research and development front.

In particular, the company sees increased interest and demand in wafer level burn-in, and as such, remain committed to investing in its FOX full wafer and singulated die test and burn-in solutions. This will enable Aehr to leverage on the huge opportunity it sees in this area.

As such, Aehr continues to make enhancements to its FOX products, including improving parallelism per wafer, adding voltage ranges, a new fully automated FOX Wafer Pak Aligner configured to integrate with its FOX-XP multi-wafer systems to enable hands free operation.

As wafer level burn-in becomes more important for more markets, this investment made today will pay off in the long-term.

We believe that this will become more important over time for widespread adoption of wafer level burn-in for multiple markets beyond the markets we address today.

Aehr has seen a recovery and strengthening in other wafer level test and burn-in markets like silicon photonics devices for data center and 5G infrastructure and 2D or 3D sensors for mobile and wearable devices.

Silicon photonics devices are devices where the semiconductor integrated circuits are combined with photonics or light-based transmitters and receivers.

This is expected to increase manufacturing capacity as well as lower the cost of fiber optic communication transmission in data centers and server farms.

In fact, several semiconductor market leaders like Intel (INTC), AMD (AMD) and Nvidia (NVDA) have discussed publicly about their investments that they are making to integrate silicon photonics transceivers into their microprocessors, graphics processors and chipsets.

Aehr has $43 million in cash and is expected to generative positive free cash flows in FY2023 and FY2024.

As such, the company remains in a strong financial position with sufficient capital needed to invest in new and large opportunities in the future.

Aehr trades at 41x FY2024 P/E, while expected to grow EPS at a 3-year CAGR of 78%.

My 1-year price target is based on 50x FY2024 P/E, which might be steep, but I think is justified given the company's competitive positioning.

As such, my 1-year price target for Aehr is $50.10, implying 21% upside from current levels.

At first glance, Aehr looks interesting as it provides a unique and value adding way to make testing for silicon carbide devices more cost effective.

With the huge growth in electric vehicles coming up, I expect the demand for silicon carbide power semiconductors to likewise increase, bringing increased need for more of Aehr's products and solutions.

With its leading silicon carbide customer base, and the potential new ones coming in the years to come, I think that the company is well positioned for the strong growth we will see in the silicon carbide space.

My 1-year price target for Aehr is $50.10, implying 21% upside from current levels.

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