AEHR Test Systems Inc. - AEHR

Is there more room on the downside?

Normally when a stock is down over 50% from when I originally chose to highlight it in a spiel, I tend to take it off my interest list and move along to other names; for the most part I like to keep things fresh rather than returning to the same old ideas (names like NAAS are an exception). That is, unless I think there may be another 50% left to go.  After reading through the transcript of AEHR’s major customer ON Semiconductor Q3 results call, my first thought would be that 2024 is going to be a rocky year for the industry so I just may decide to keep it on my list. 

In that spirit, the following are a few highlights (or perhaps lowlights) from today’s conference call and why there may be some reason for concern from ON’s comments for the folks at AEHR.

First, as a refresher, and as it relates to AEHR, the reason we care about what ON is saying is because in AEHR’s most recent quarter ON was an 88% revenue contributor and has been over 80% in each of the last 3 quarters.  If you take away ON revenues over the past couple of years, AEHR revenues would basically be about flat.  It’s not an overstatement to say that without the support from ON, shares of AEHR would still be stuck in the low single digits much as they had been for the past couple of decades. 

As I highlighted in my prior note, AEHR believes that in their FY2024 that they can possibly have up to 5 greater than 10% revenue customers in the year, but certainly at least 3, as they were putting together their $100M revenue guidance for 2024.  This guidance is heavily influenced by capex from companies like ON that either are or perhaps may be interested in making AEHR test equipment part of their manufacturing process.

With that as background, here are a few quotes from the press release and conference call.

Regarding their Q3 overall automotive business and the growth:

“Record automotive revenue of $1.2 billion, and increased 33 percent year-over-year”

Expectations for the Silicon Carbide portion of the automotive business in Q4?

“However, for the full year, a single automotive OEM's recent reduction in demand will impact our $1 billion target, and we now expect to ship more than $800 million of silicon carbide in 2023, 4x last year's revenue.”

So ON is taking their high-growth Silicon Carbide automotive EV business $1B revenue expectation down by $200M for the year, and assuming they were on target to hit that number after the first 3 quarters, then that is all coming out of Q4 numbers.  On the call they said there would still be sequential growth in Silicon Carbide, just not as much as they had hoped.  Analysts were at around $2.15B for overall Q4 revenues, and the company is taking those expectations down by around $200M, or about what they are chopping off of automotive expectations.  So after a 30% rate of growth for the overall automotive business, they expect it to be negative in Q4.

“We expect a mid-single-digit decline in automotive given the softness in Europe that Hassane described, with greater sequential declines in industrial and other end markets.”

More importantly for AEHR, ON is maintaining Capex for the remainder of the year, but it will be coming down in 2024 which may impact how much additional equipment will be ordered from folks like AEHR going forward.

“Capital expenditures during Q3 were $433 million, which equates to a capital intensity of 19.9%.”

“We expect capital expenditures of $425 million to $465 million in brownfield investments, primarily in silicon carbide and EFK.”

“This incredible execution and improved manufacturing output on 150 millimeters enables us to slow our capacity expansion and lower 2024 capital intensity from the high teens to the low teens percentage points ahead of our original plan and closing in on our long-term model.”

The company continually points out that Silicon Carbide is growing for them and that it will continue to be a huge area of growth for them, though perhaps not at the levels that they had previously believed.

Now, what effect ON’s lowering Capex in 2024 has on their ordering patterns with AEHR remains to be seem, but perhaps more importantly if the same reduced Capex plans holds true for others in the Silicon Carbide chip space (Wolfspeed, ST Micro).  As you read in my last note, there has been some hesitation from other manufacturers to widely adopt AEHR’s solution, and if like ON it’s due to reduced Capex in the future, then AEHR just might find their guidance to be a bit too optimistic.