COMPANY & TECHNOLOGY OVERVIEW
Aehr Test Systems provides semiconductor burn-in and testing systems for semiconductor companies worldwide. Burn-in is used for evaluating the reliability of electronic components, such as silicon carbide. During burn- in, the components are subjected to a high-stress environment, such as elevated temperature and voltage, for an extended period of time. This ages the components so any defects or weaknesses that are present in the components can be discovered during testing to avoid an in-the-field failure.
This type of failure is particularly acute in the electric vehicle market, where a failure of a traction control inverter can result in a “walk-home event” – leaving the customer completely unable to operate their vehicle.
In addition to the high consequence of failed components, EVs also tend to gain increased range of ~10-15% when utilizing silicon carbide (SiC), though it comes at a slightly higher cost. For this reason many industry participants are starting to transition aggressively to SiC technologies, which will benefit burn-in and testing companies in general, and Aehr in particular.
COMPETITIVE ADVANTAGE
The industry has traditionally relied on a testing methodology called “package part” burn-in and testing. Package part testing is performed on the packaged components, after they have been separated from the wafer and packaged into their final form. Under this process the completed component is tested at the end of the manufacturing process, meaning a failure of a component can result in the final product being scrapped. Wafer-level testing by contrast happens before the components are packaged, meaning there is a lower realized cost when the components fail the test procedure.
Due to this intrinsic benefit of wafer-level testing, the industry is moving towards this testing approach. However, even within the wafer-level testing space, there are important differences which will help determine the ultimate winners and losers in this space.
Traditionally, most wafer-level testing involves a “blade” probe card. These probe cards can have over a thousand electrical contacts used to test the SiC chips. These physical contacts can wear out after a year, requiring frequent replacement. This type of testing carries a higher risk of damaging the blades or introducing additional defects. In contrast, contactless burn-in testing avoids making physical contact with the blades, which reduces the risk of damaging them. In addition to limiting damage, it also reduces the spending needed on consumables.
Some chipmakers want to run burn-in for just a few hours, but Aehr is educating many customers about failures which can show up 6-10 hours into a burn-in. Longer burn-in durations are gaining traction in the semiconductor industry, especially for components where a single chip failure would cause a car accident. Given the long duration of these tests, the capacity of each testing machine is a significant bottleneck. And this fact is where Aehr has the most significant advantage over their competitors. Aehr’s FOX-XP system allows customers the ability to burn-in 18 wafers simultaneously.
By burning-in 18 wafers at the same time, Aehr is able to provide a significant time-saving and through put advantage to their customers. Each burn-in chamber is about the size of a small vehicle, meaning that the ability to burn-in and test multiple wafers at the same time and in the same space also provides a floor space saving to their customers.
While many competitors have moved away from packaged part burn-in testing towards wafer level testing, none is able to match Aehr’s throughput advantage. This advantage is protected by patents, which CEO Gayn Erickson has indicated they will defend vigorously should any competitors try to infringe upon their IP.
The end result of their technological and cost advantage is that their testing systems have a clear lead over the competition, and the most efficient path forward for scaling. If SiC testing demand increases substantially, Aehr is poised to be the most logical supplier which can scale up efficiently.
Aehr’s technological advantage offers a quasi-monopoly. Their FOX-XP is able to offer 18 wafers at a time with their equipment for a total upfront cost of $4.5 million, or a cost of $250,000 per wafer of capacity. The competition cannot compete in our opinion. The competition for wafer-level burn-in equipment ranges in cost $700,000 to $1 million per wafer. The 60%+ discount on per wafer cost is an offer that SiC chipmakers “cannot refuse” if they are aware of the option. Aehr is able to price their product for great affordability for their customers while targeting around 50% gross margins.
COMMENTARY FROM THE CEO: BENEFITS AND GROWTH POTENTIAL OF FOX-XP SYSTEM“We’re currently engaged or in discussions with almost all the existing and future SiC suppliers now, regarding our unique low- cost multi-wafer level test and burn-in solution that enables contact to and test of 100% of devices on every wafer. This allows our customers to burn-in every device at a lower cost than they could in any other form, due to our ability to contact thousands of devices on each of 18 wafers at a time with our FOX-XP multi-wafer test and burn-in system and proprietary FOX Full Wafer Contact WaferPaks.All of these major SiC companies expect that electric vehicle traction inverters will move to multi-chip modules as this is where the electric vehicle manufacturers are driving the industry. As such, they’ve told us they must move to wafer- level test and burn-in to remove the inherent failures before they put these devices into multi-die modules to meet the cost, yield and reliability goals of those modules.”Gayn Erickson, President & CEO of AEHR Test Systems. Q1 2023 earnings call.
ELECTRIC VEHICLE DEMAND
One of the primary use cases for SiC is in the traction inverters for electric vehicles. Tesla first introduced this technology on the Model 3 and found that it led to a substantial increase in vehicle range. In addition, using SiC based metal-oxide-semiconductor field-effect transistors, or MOSFETs, for their on-board charging inverters also leads to reduced charging times when compared to the traditional silicon-based MOSFETs. These benefits greatly enhance the overall EV ownership experience, and Aehr’s management team believes that more silicon suppliers will convert to SiC to enhance the delivered value to the end- customer.
Tesla traction inverters alone use dozens of MOSFETs, and a dual motor EV will use twice as many. This use case therefore represents a significant amount of potential burn-in and testing volume. As EV sales grow over the coming decade, scalable burn-in and testing solutions are likely to see explosive growth.
CEO Gayn Erickson has publicly discussed the potential for SiC output to 25x by the end of the decade, though he has expressed caution around that figure. SiC manufacturers might not be moving aggressively enough to ensure adequate supply for the EV market’s growth. According to Canaccord Genuity, the announced plans for SiC suppliers such as Onsemi are only sufficient to meet half of the expected need by 2030.
These market dynamics are shifting rapidly, but Aehr is well positioned to take scale up rapidly, and may see their pricing power increase if demand is greater than supply.
RECENT FINANCIAL PERFORMANCE
Between 2018 and 2021, Aehr had declining revenues and was not profitable in most periods. In the past year however, revenues have exploded as Onsemi has moved aggressively to expand the use of Aehr’s systems in their facilities. What historically looked like a microcap company with mediocre margins rather suddenly turned into a growth company poised to benefit significantly from operating leverage. For the reasons noted previously, the company seems to have the right product at the right time, and is poised to see drastic revenue growth while maintaining pricing power.
The huge spike in revenue which is mostly attributable to Onsemi may just be the tip of the iceberg. In the quarter ending in May of 2022, Onsemi accounted for a staggering 82% of revenue. While this level of customer concentration can understandably be viewed as a risk, we believe it is actually best viewed as an opportunity. Onsemi moved quickly once they understood the value proposition of Aehr’s product in the rapidly growing SiC segment, and it stands to reason that others may follow suit. CEO Gayn Erickson has indicated there are 2-6 other companies which could provide order flow of the same magnitude as Onsemi, even while Onsemi continues to grow capacity.
As can be seen in the chart above, revenue growth translates very clearly into improved operating margins. This fact was identified by Halter Ferguson Financial and confirmed by CEO Gayn Erickson, who noted that incremental sales have a contribution margin of about 60%.
If this contribution margin is sustainable as the company scales revenue, the company could turn into a cash cow with operating and net margins more typical of software companies.
INTERIM FY2025 EVALUATION
We believe that the company is likely to experience a multiplication of its revenue in the coming years. Given Aehr’s premium valuation at a 11x sales and 30x forward earnings, it seems that the market agrees. The question therefore is how much growth Aehr can achieve, and at what level of profitability. Our checks with a Tier One traction inverter supplier indicate that legacy auto companies such as Audi, GM, Mercedes, and Stellantis all intend to use SiC in their inverters. In our opinion, adoption of SiC by non-EV pureplay automakers is at hand.
Given the number of large SiC factories being built and ramped over the next 2.5 years, our interim valuation checkpoints are by May 31st, 2025. For example, Wolfspeed plans to begin ramping a factory in Mohawk Valley, NY in spring of 2023. Infineon is building a $2.5 million factory in Malaysia around 2024. Gayn Erickson claims Aehr is in talks with the major SiC chipmakers and even two companies that are major chipmakers but have not yet announced intentions to make SiC devices. One in the latter category gave Aehr a $4 million order in the last 3 months.
In fiscal year ending May 31st 2022, we estimate Onsemi represented $40 million in revenue. This information was gained by triangulating Aehr comments that Onsemi represented 80-82% of revenues for the fiscal quarter and fiscal year. In a recent call, Gayn said many of the potential customers intend to build out to a similar magnitude of Onsemi. Our interim checkpoint valuations below will use this basis.
In addition to these three scenarios, there is another unmodeled upside scenario in which additional use cases such as solid-state memory provide a longer runway to ramp revenues. This could result in significant upside optionality beyond the levels identified in the bull case. This would most likely manifest itself in a higher 2030 revenue figure, as well as a higher presumed LT growth rate due to additional market opportunities.
AEHR VALUATION SCENARIO SENSITIVITIES
BASE CASE
The assumptions here are each major SiC maker orders about $40 million in product from Aehr in FY 2025, if Aehr were to sign up four major players, and if 20% of Aehr’s revenues came from service agreements or one-off engineering tests. They would have $200 million in revenue in FY 2025. At incremental net margin of 27% from FY 2022 base, this gets profits to $50 million and a CAGR of 74% vs FY 2022. At a multiple of 37, that suggests a future valuation of $1.84 billion. Implies a current value per share of $45.35 when discounted at 11.3%.
BULL CASE
If instead 4 current major SiC chipmakers were customers and 2 upstarts joined the fray and they all ordered from Aehr with 20% more revenue coming from smaller players… Aehr could end up with $288 million in revenue in FY 2025. With incremental net margins of 30%, net profits would total $73 million, achieving a profit CAGR of 98%. At a multiple of 49, that suggests a future valuation of $3.6 billion. This implies a current value per share of $88.76 when discounted at 11.3%.
BEAR CASE
If instead only 3 current customers come along for the ride with Aehr, and there were no additional revenues from smaller orders. Aehr could end up with $120 million in revenue in FY 2025. With incremental net margins of 23%, net profits would total $25 million, achieving a profit CAGR of 39% vs FY 2022. At a multiple of 20, that suggests a future valuation of $507 million. Implies a current value per share of $12.50 when discounted at 11.3%.
CONCLUDING THOUGHTS
It’s easy to be excited about Aehr’s prospects. They are selling a key “picks and shovels” product with defensible IP and a clear value proposition in a market which we believe is poised to grow exponentially. There are certainly risks, but in this case, we believe they are outweighed by the magnitude of the opportunity.
KEY RISKS
CUSTOMER CONCENTRATION – Onsemi has accounted for over 80% of revenues recently. A change in their preferred vendor or technology could be catastrophic to Aehr.
PREMIUM VALUATION – AEHR is trading at 62x trailing EPS, 11x sales and 53x EBITDA in a bear market.
EXECUTION RISK – Given the valuation premium, future growth at profitable levels is already baked in to some degree. Proper execution is necessary for future stock gains.
INVESTMENT THESIS
EXPLOSIVE MARKET – EV adoption is poised to skyrocket, and SiC is becoming recognized as a crucial technology.
CLEAR VALUE PROPOSITION – Aehr’s ability to test 18 wafers simultaneously provides a cost advantage to customers and a credible trajectory to scale better than any competitor.
OPERATING LEVERAGE – Incremental sales at a ~60% contribution margin will drastically transform the company’s financials.
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Redistribution or reproduction must contain entire page/entire report. As of January 10, 2023, Clients and employees of our firm Halter Ferguson Financial own AEHR stock and/or options and thereby stand to materially benefit from a rise in the share price. Past performance is no assurance of future results. Halter Ferguson Financial, Inc. (“Halter Ferguson Financial”) is a registered investment adviser with its principal place of business in the State of Indiana. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Opinions expressed are those of Halter Ferguson Financial, Inc. and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security.