This One Will Stick: Maintaining Aehr Test Systems With A Buy

seekingalpha10-13

I'm reaffirming my buy rating on Aehr Test Systems stock as an under-the-radar name for longer-term investors.The stock underperformed the S&P 500 by over 70% YTD and is undervalued at current levels....

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Dmytro Diedov/iStock via Getty Images Investment thesis Aehr Test Systems (NASDAQ:AEHR) reported 1Q25 earnings on October 10 and the stock was up 9% in pe-market trading as the company beat consensus on both top and bottom line. Revenue beat expectations by $0.93 million at $13.1 million, down 36.5% year over year and EPS beat expectations by $0.06 at $0.07. I last wrote on Aehr in late July after 4Q24 earnings, arguing that there was room for another beat in 1HFY25 on better-than-fear results, and that’s exactly what I saw play out this quarter. The company reiterated its FY25 guidance for at least $70M in revenue, still lower than consensus at $71.2M. Part of my bullish outlook on Aehr is that I see potential for upward revision in FY25 guidance in 2HFY25 as the EV industry recovers and continues its SiC adoption. The investment thesis I proposed back in July remains at play. I continue to expect Aehr to benefit from \"new target markets in the works plus increased SIC demand in 2025 once automotive end demand rebounds,\" and we're seeing more macro signs leading to that rebound moment. The stock's significant pullback that took place over the past three-months can be partially attributed to higher short interest, with 17% of the float being short, according to data from Refinitiv. I don’t think investors should take that dip as a reason to shy away from Aehr. I continue to recommend the stock as an attractive, under-the-radar name for long-term investors. I see more upside for the company in FY25 when SiC picks up in 2025 and better orders from its position in EV and AI markets come through. Aehr’s market and economic tailwinds My belief is that we’re more likely to see better order rates coming out of the EV market next year as the Federal Reserve began its first interest rate cuts in four years, which should allow for more comfortable spending on EVs and auto in general. I believe that the company will benefit from rising demand and migration for silicon carbide (\"SiC\") for EVs and power electronics, and short-term uncertainty doesn’t hinder Aehr’s growth prospects. According to the earnings call, management is making “steady progress” in their benchmarks and engagements and expects the silicon carbide business will continue to gain momentum over the next two quarters. Needless to say, and consistent with my beliefs from my last article, I share the sentiment. Aehr remains well positioned in the global wafer-level test and burn-in market, which is anticipated to reach $5.6 billion by 2031, growing at a CAGR of ~4%. The increased use of semiconductors in auto and telecom sectors proposes more potential upside for Aehr within this market going into 2H25; the higher industry adoption of wafer-level test and burn-in solutions should translate to more content gains for Aehr and higher price benefits once end demand in both markets rebounds. Considering this, I think investors are now starting to see Aehr’s longer-term positives and have let go of near-term woes with the stock's run up post earnings. I see more upside ahead as EV expansion is steering more toward SiC systems. Management’s view on the industry confirms that EV suppliers are “clearly moving towards silicon carbide and integrated modules, combining silicon carbide MOSFETs into single packages to meet the industry’s power, efficiency, and cost-effectiveness demands.”   YChart The stock is down ~49.7% year to date against the S&P500, which is up ~21%; this means Aehr has underperformed SPY by around 70% since the start of the year. The stock is cheap, both in terms of valuation and price. In my opinion, the massive dip Aehr experienced year-to-date de-risks the stock, which leads me to believe there is a limited downside from here. With the stock up in premarket trading after this quarter’s report, I think the only way from here is up. I continue to see more upside in FY25 and continue to expect another beat next quarter, with market expectations still relatively conservative. I’ll explain why in a second. Tailwinds from entering new target markets will take time I think Aehr is well-positioned to grow its business through the adoption of SiC in the industry. In 4Q24, management announced they received over $12 million in orders from one of their silicon carbide customers for WaferPak, and 1Q25 was no different with another $12 million in WaferPak sales; I believe there are more opportunities on the table there. The impact of the new target markets won't show up until 2HFY25. According to management, silicon carbide customers are expecting capacity expansion needs in 2025 and some are forecasting the purchase of either one or two systems in the early innings of 2025 and for production volumes in 2HFY25 into 2026. On a related note, demand for Fox WaferPak full wafer contractors for silicon carbide continues to see strong demand, for Aehr’s “installed base of FOX-XP and FOX-NP wafer level test and burn-in systems, driven by a record number of new device designs started this past quarter.” I expect the new designs to support more WaferPak orders in 2H25. While my optimism about SiC is mainly steered toward the EV market, I am also watching the growing demand in other industries, such as solar and data centers. Management’s acquisition of Incal Technology makes it all the more well-positioned to take on the AI market, in my opinion. Let me remind everyone of what CEO Gayn Erickson said on the recent earnings call: Customer feedback on this acquisition has been overwhelmingly positive, with several meetings held over the past few weeks where some customers indicated increased forecasts for engineering qualification, as well as for volume production. Last month, we were pleased to announce the first volume production orders for Incal's new Sonoma ultra-high-power semiconductor test and burn-in solution for test of AI processors. These orders were placed by a large-scale data center hyperscaler that provides computing power and storage capacity to millions of users worldwide today. Valuation I believe the stock is overvalued for short-term investors but undervalued for long-term investors. It is currently trading at $12.26, with a market cap of $362.7 million and an enterprise value of $319.7 million. The stock price decreased over 72% in the past year and is down over 50% year to date. The beta is 2.05, indicating price volatility higher than the market average. Market sentiment on the stock is split in half, as 50% of Street Analysts give the stock a buy, and another 50% give it a hold. According to data from Refinitiv, the PT median was at $12 in July and surged up to $25 through August and September, and it is currently maintaining the $25 price. The PT median followed the same trend, at $12 in July, and has maintained the $25 price until now. I think the sell-side PT is fair and achievable, considering conservative expectations and potential in new target markets. The mean and median price target suggests a 100% potential upside from its current price, and I believe that’s due to Aehr’s position in the semiconductor industry, its role in the EV supply chain and potentially in AI. I continue to believe the company has more “secular tailwinds working in its favor than its valuation gives it credit for, particularly when contextualizing the company in the semiconductor peer group and after the Incal acquisition.” The EV/Sales ratio is 5.2, which is lower than the semi-peer group average of 7.9. The company maintains healthy financials with $40.8 million in cash, down from $49.3 million last quarter, basically reflecting the $10.6 million in net cash due to the Incal acquisition. The company now also has $0 in debt, compared to $6.2 million last quarter, indicating strong liquidity. I expect the company to continue to outperform towards the second half of the fiscal year, and believe the stock is still too cheap to ignore at current levels. There is no investment without risk, but with Aehr, I believe the risk is at a minimum because the market has priced in the worst-case scenario and is now starting to digest the positives. What’s next I continue to see more upside into 2025 and think management’s efforts in diversifying its market targets will support the re-acceleration of top-line growth in 2025. I also think the Incal acquisition will further widen the company’s reach in terms of AI exposure. Along with the expected SiC rebound in 2025, I think Aehr is now better positioned to ride the wave.   Aehr Test Systems 10K  Referencing the image above, I think the odds are in Aehr’s favor, and I believe the company has more upside ahead on a geographic basis. FY24 total revenues increased from a year ago quarter, and that was backed by an increase in international revenues due to increased shipments to customers in 1. Asia, and 2. Europe; this was partially offset by a decline in revenue from a customer in the U.S. The U.S. made 5.3% of total revenue, down from 14.3% in a year ago quarter. I think the demand coming out of the U.S. should strengthen into next year in a more friendly interest rate environment. According to the company’s 10K form, Asia made around 88% of total revenues, and Europe made 7%, up from 85% and 0.1% in a year ago quarter. Last week’s announcement of a new and improved stimulus plan coming out of China should also help boost demand coming out of Asia, as China remains the largest EV market.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2475017825"}