Aehr Test Systems Has a Lot of Long Term Growth Potential

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Written By Dean McHugh

Aehr Test Systems may be experiencing a downturn in its business cycle, but its long-term growth potential remains intact. With no long-term debt and management’s expectations for a reversal of the recent slowdown, the small-cap player in the semiconductor manufacturing industry is poised to weather the storm.

The significant increase in backlog and bookings should set AEHR back on the right track.

Company Overview

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Aehr Test Systems provides semiconductor wafer testing and burn-in solutions, primarily for Silicon Carbide (SiC) chips used in full battery electric vehicle (EV) applications. The recent slowdown in the EV market has disproportionately impacted AEHR’s financials.

Delayed deliveries, increased inventory, and lowered guidance have hit the stock hard, but this also presents a potential opportunity for long-term investors.

Financial Performance

In the quarter ending February 29, 2024, AEHR reported a sharp decline in revenue, gross profit, and operating income. This led the company to pre-announce results and lower guidance prior to the earnings report. As a result, AEHR shifted from profitability to operating and net losses in Q3.

Despite the recent downturn, AEHR’s financials have shown resilience in the past. During the pandemic, cash flows increased significantly, demonstrating the company’s ability to navigate challenging market conditions.

However, inventory has increased sequentially, and the cash conversion cycle has skyrocketed. The company needs to turn its inventory into cash more quickly to improve its financials.

A Second Half Story?

AEHR is expected to finish its fiscal year strong. During the Q3 earnings call, management reiterated its full-year guidance of greater than $65 million in revenue and at least $11 million in net income. This suggests that the company will recognize at least $15.4 million in revenue and $2.7 million in net income in Q4.

Revenue was impacted by delayed orders and over-inventory across its customers. Sequentially, quarterly bookings improved from $2.2 million in Q2 to $24.5 million in Q3.

Meanwhile, backlog increased from $3 million to $20 million, and the company received an order from a new customer. This indicates that AEHR may have bottomed out, and it will be interesting to see how much revenue is recognized in Q4.


As the stock price has fallen, AEHR’s valuation has become more reasonable. Using TTM figures, the company currently trades at a P/S of 5.1x, a P/GP of 10.4x, and a P/E of 25.8x. Compared to its average valuations since May 2021, the current P/S ratio is roughly 51.5% lower, the P/Gross Profit is lower by 54%, and the P/E is 59% lower.

While the stock still trades at a premium to the market, its growth potential justifies some amount of premium.

A reverse DCF analysis with a 15.0% discount rate and a 4.0% terminal rate suggests that AEHR needs to grow its FCF at a CAGR of 37.4% off its trailing twelve-month base of $4.5 million to deliver a roughly 15% annualized return for shareholders. If stock-based compensation is subtracted, the required growth rate increases to a 43.2% CAGR.

Growth Outlook

Analysts expect top-line and profit growth to return by fiscal 2025, with explosive growth anticipated by 2026. The silicon carbide semiconductor market is expected to grow at a high rate, with estimates ranging from 23.8% to 32.6% CAGR. AEHR’s testing and burn-in products help companies save money and increase profits by ensuring reliability and performance. As the market grows, demand for AEHR’s services should grow along with it.

The EV Market

The EV market is still growing, despite recent softening. Goldman Sachs estimates a 10.9% CAGR for EV sales between 2023 and 2040 in a bearish scenario, with a 20.2% CAGR between 2023 and 2029 in a base case scenario. AEHR’s business is not entirely reliant on fully electric vehicle applications, as hybrid and plug-in hybrids also benefit from the use of SiC chips.

Other Areas of Growth

AEHR has opportunities to grow in Asia and in new product areas such as Gallium nitride testing systems, NAND and DRAM applications in the memory market, and Silicon Photonics. These areas are relatively new for the company and may take many quarters to become significant parts of the business.


AEHR faces risks from inventory backup, customer concentration, and reliance on the EV market. The company’s financials have deteriorated, and a further slowdown in the EV market could impact its revenues. However, the long-term growth potential and improving market conditions suggest that AEHR is well-positioned to recover.

Long-Term Potential Remains

Credits: DepositPhotos

Investing in AEHR requires patience and a long-term perspective. Investors with strong conviction in the growth story can consider dollar-cost averaging into the stock while it is near its bottom. Waiting for signs of improvement in inventory and revenue growth before investing could also be a prudent strategy.

If the growth story unfolds as expected, AEHR has the potential to deliver significant returns, making it a compelling investment opportunity.


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