Why This Tech Stock Could Double Its Value
In a growing industry, companies that are performing well in their niche are usually worth paying attention to. And when the stock plummeted to a much more reasonable valuation, it got even more interesting. The same goes for semiconductor companies. Aehr Test System (NASDAQ:AEHR).
This stock has massive growth potential that could double its value over the next two years at around $29 per share. There are a few red flags to watch out for, but the growth potential is too promising to ignore.
Sales expected to grow by 50% in 2024
Aehr Test Systems is a company that manufactures test systems for silicon carbide (SiC) chips. This is the preferred chip for higher voltage and higher temperature applications, including electric vehicles (EV), 5G cellular technology, solar inverters, and more. The silicon carbide market is growing rapidly with the introduction of EVs, but its potential is still only visible.
According to a recent report by McKinsey & Co., the SiC market is expected to grow at a compound annual growth rate (CAGR) of approximately 26% between now and 2030. It is expected to grow from $2 billion today to $11 billion and $14 billion by 2030. McKinsey predicts that 70% of the demand will come from EVs.
Aehr Test Systems does not make so-called SiC chips or wafers, but it does make test systems for these devices, called burn-in testing. Founded in 1977, Aehr Test Systems is a leader in a niche market dominated by only a few major players. With over 2,500 test systems installed worldwide, we are well positioned to grow with this market.
Growth this year was solid, with the company generating $20.6 million in revenue in the first quarter of fiscal 2024, which ended Aug. 31, up 93% from the previous year. Net income rose nearly 700% to $4.7 million, or 16 cents per share, from 2 cents per share in the same quarter in 2022. President and CEO Gayn Erickson said it was the best first quarter in the company’s history.
Additionally, Aehr’s bookings for the quarter were $18.4 million and its order backlog was $22.3 million, up 14% from the previous year. One of the new customers this quarter was a multibillion-dollar semiconductor supplier serving multiple markets, including automotive, computing, consumer, energy, industrial and healthcare, Erickson said.
“This new customer, as well as the last two announced, chose our systems primarily for applications other than electric vehicles, such as industrial, solar, and commuter electric trains. This further expands our application space beyond the opportunities seen in silicon carbide for traction inverters and on-board and off-board chargers for electric vehicles,” said Erickson.
For fiscal 2024, the company maintained guidance for revenue growth of at least 50% and profit growth of 90%.
Stock prices should continue to rise
Aehr stock was up about 39% year-over-year as of Dec. 19, reaching about $29 per share, but by Sept. 6 it was trading at just over $52 per share. That’s 187% YTD before the plunge in September and October. As the fiscal first quarter numbers show, the decline actually has nothing to do with the company’s performance.
This decline is likely related to several factors, namely the overall market decline in August, September, and October. High valuation of Aehr stock after huge rise; And perhaps it’s the fact that it hasn’t raised its guidance for 2024, despite calling for 90% earnings growth.
However, this is good news for investors as the high valuation has come down to reasonable levels, with the stock trading at 42 times earnings, down from 102 times earnings at the end of August. Although still high, it is reasonable considering high growth expectations.
What needs to be noted is the concentration of profits. Aehr has one major customer that generates 79% of the company’s revenue, with its second largest customer accounting for about 10%. On the first quarter earnings call, CFO Ken Spink said he expects to see three or four more customers in 2024. Being too closely tied to a small number of customers and taking a large chunk of revenue from just one customer is something that needs to be maintained. Pay attention, because losing a key customer will hit you hard.
However, Aehr Tests Systems is a leader in this market and has a long history dating back to 1977, so it will be able to grow with the sector.
As a small company with a market capitalization of about $804 million, it doesn’t have a lot of analyst attention, but in July investment analysts at Craig-Hallum gave it a $60 price target based on earnings forecasts. It will be more than double the current price. Whether it will grow that quickly is yet to be seen, but there appear to be tailwinds for long-term growth.
