Aehr Test Systems (AEHR -0.73%), which makes semiconductor test and reliability qualification equipment, released its fiscal fourth-quarter 2023 report last Thursday. Investors liked the report, driving shares up 18.2% on Friday and up another 6.6% on Monday.
Revenue for the quarter ended May 31 grew 10% year over year to $22.3 million. Adjusted net income was $6.8 million, or $0.23 per share, flat with the year-ago period. The top line met Wall Street's consensus estimate, while the bottom line exceeded it.
Along with the earnings beat, another likely catalyst behind investors' enthusiasm was management's upbeat comments on the earnings call about the company's long-term growth potential. In addition, a chunk of the stock's post-earnings release gain was likely due to covering by short-sellers, as the stock has a sizable short interest. (Short-sellers are those who are betting that a stock's price will fall.)
Earnings releases tell only part of the story. Here are two key things management shared on Aehr's Q4 earnings call that investors should know.
1. Huge growth potential from wafer-level test and burn-in products for silicon carbide and other markets
From CEO Gayn Erickson's remarks:
The market forecast for wafer-level burn-in products is significant. [Investment bank] William Blair estimates the total available market for wafer-level burn-in products for silicon carbide alone to be over $400 million by 2027. We believe Aehr has the potential to capture a significant portion of that market based on the level of silicon carbide engagements we have with the customers across the globe.
First, let's put the projection of a $400 million market size by 2027 in context. In fiscal 2023 (ended May 31), Aehr generated revenue of $65 million, and management has guided for revenue of over $100 million in fiscal 2024. We don't know the revenue breakdown, but it's safe to assume the vast majority of fiscal 2023 revenue stems from the silicon carbide wafer-level test and burn-in products, which includes systems and consumables.?
So, assuming this $400 million estimate turns out to be a fairly accurate projection and Aehr can capture a "significant portion" of this market, as management believes, the company has very strong growth potential. And that growth potential will be even stronger if the $400 million proves to be a conservative estimate of the 2027 market size.
The biggest long-term driver of the growth of this market will likely be the increasing use of silicon carbide devices in electric vehicles (EV).
Second, management is projecting that the company has significant growth potential from markets beyond silicon carbide wafer-level test and burn-in products. Erickson said on the earnings call that management believes "silicon photonics can become a significant market for wafer-level test and burn-in and could become as large or larger than the silicon carbide market for our products later in this decade."
2. Customer concentration risk is extremely high?
From the remarks of former CFO Kenneth Spink (who is staying on through the completion of Aehr's fiscal 2023 annual report, which is expected to be late August):?
We did actually have 2 customers [that accounted for] over 10% [of our fiscal 2023 revenue], one at 79% of revenues and the other at 10% of revenues.
The riskiest aspect of Aehr stock as an investment is the company's extremely high customer concentration risk. Aehr's business would plummet if the one customer that accounted for 79% of the company's total revenue in fiscal 2023 suddenly decided to either stop buying, or significantly cut down its spending on, Aehr's products. That event would also almost surely send the stock plunging.?
That said, management expects that this customer concentration will decline over time, likely starting with the current fiscal year. Erickson said that management expects several customers to account for more than 10% of total revenue in fiscal 2024. He added, "[W]e were obviously very heavily focused on our big silicon carbide customer this last year. And we expect while they will continue to be a great customer and certainly a 10% customer for years to come, that there will be less of a focus in terms of concentration with them."
In a nutshell, Aehr Test Systems stock is a high-risk, potentially high-reward investment.