Description

AEHR Technologies is a supplier of semiconductor burn-in test capital equipment. AEHR sells tools primarily into the high growth silicon carbide (SiC) power device market. The stock has been a huge winner over the last two years, as revenue has skyrocketed four-fold, and investors have slapped a generous multiple on the company as a result. AEHR is now trading at 12x Sales and 50x non-GAAP (untaxed) EPS on FY23 (May) numbers. The problem I see for AEHR is that this strong growth has been driven by one customer, and that customer, I believe, should start declining next year. This customer, OnSemi (ON), was 80% of revenue on a TTM basis and is likely to start reducing purchases beginning in CY24, based on ON’s public disclosures regarding their SiC capacity plans. Even if we assume substantial growth from new customers, AEHR will be unable to hit the street’s aggressive FY24-FY25 revenue estimates, due to this decline from ON. The stock is up 45% YTD, ~200% in the last year, and over 1000% over the last two years on the back of their growth with ON; I expect there to be substantial downside once ON starts to roll over. I see around 50% downside to fair value around $15/share, which would represent a roughly peer average 4x Sales on my FY25 estimates, and 20x GAAP EPS. 

Background

The market for silicon carbide (SiC) power devices (chips) was estimated to be around $2B in CY22, with electric vehicles representing the bulk of that demand. TSLA has led the adoption of SiC in EVs, having first started using SiC devices from STMicro (STM) in the Model 3 in 2018. Since then, SiC has become widely adopted by multiple auto OEMs for use in their EVs. SiC chips are a good solution for EVs, as they allow EVs to be more power efficient, and thus extend battery range. Estimates have the market for SiC devices growing several-fold over the next few years, from around ~$2B in CY22 to $7B-$11B in the 2026-2027 timeframe. 

There are five major SiC device manufacturers, with STM currently being the largest. Most have put out multi-year revenue targets for $1B+ in annual SiC in revenue. Below are actual/estimated/projected SiC revenues by manufacturer pulled from company disclosures and sell-side estimates: 

While SiC chips allow for more efficient power usage and extended range in EVs, the chips are both more expensive to produce than traditional silicon chips, and also have higher material defect rates/failures, particularly when exposed to high temperatures. SiC failures follow the so-called ‘bathtub curve’ whereby the failure rate is high early on (“infant mortality”), then decreases exponentially to reach a steady-state of low failure, before eventually rising again around the end of the chip’s life. Because of the high infant mortality, and the need for chips in EVs to be able to withstand extreme temperatures without failing, SiC chips need to undergo high temperature burn-in testing to catch these early failures. EVs OEMs require that the SiC devices they purchase have already gone through high temperature burn-in so as to weed out defective chips. 

This high temperature burn-in step can either be done on the finished packaged device, or it can be done earlier, at wafer level, before the individual die have been separated and packaged. AEHR’s FOX-XP tools do this burn-in testing step at the wafer level, and allow for up to 18 wafers to be burned in at the same time. The primary benefit of doing burn-in at wafer level is catching defective die before they are packaged, and thus saving costs by not packaging bad die. SiC chip suppliers to date have been mixed on the need for adopting wafer level burn-in. ON has been to the only one that’s gone all in on wafer level test, while the largest player STM has not adopted it all. STM, and others, instead just do burn-in testing on the finished packaged devices, before those devices go to their EV customers. 

Below I’ll go into more detail on AEHR’s various SiC customers (or potential customers), but overall, of the 5 major SiC device manufactures only ON (#5 player by 2022 revenue) has widely adopted AEHR’s wafer level burn-in. STM (#1 player) has not adopted, nor do they apparently have plans to. 

AEHR has announced early engagements with two other SiC suppliers in recent months, one for initial production tool orders, and one who has ‘selected’ AEHR. 

While I believe that broader adoption of AEHR’s tools more widely beyond ON is possible, or even likely, I don’t see this adoption being anywhere near enough for AEHR to hit FY24/FY25 consensus expectations.

For additional background on AEHR’s technology, SemiAnalysis had a good write-up:

https://www.semianalysis.com/p/aehr-multi-wafer-level-burn-in-test?utm_source=%2Fsearch%2FAEHR&utm_medium=reader2

On Semiconductor (ON)

AEHR shipped its first tool to ON for SiC EV applications in CY19. Then, in CY21, orders and shipments to ON really took off as ON began to ramp its SiC capacity build in earnest. ON did $200M+ in SiC revenues in CY22 and expects to do $1B in CY23. As of last month’s earnings call, ON had $4.5B in committed Long Term Supply Agreement (LTSA) revenue over the CY23-CY25 period. Given an approximate $1B/$1.5B/$2.0B cadence for the ON LTSAs in CY23/CY24/CY25, we’d expect that ON likely had SiC revenue capacity approaching $1B entering CY23, and should be approaching $1.5B of capacity exiting CY23. ON would be targeting having something over $2B in revenue capacity for CY25 to meet their LTSAs.

To date, AEHR has shipped $75M-$80M in FOX-XP tools and related consumables (Waferpaks) to ON. On a TTM basis, ON was 80% of AEHR’s revenue. At an ASP of $2.5M for the FOX-XP tool + $1.5M in Waferpaks, that translates to about 20 FOX-XP tools to ON to date. With the most recently announced $25M FOX-XP tool order in January 2023 from ON (expected to be accompanied by $15M in Waferpaks) to be delivered over the March 1, 2023-November 30, 2023 three quarter period, AEHR will likely have shipped about 30 FOX-XP tools to ON by the end of November. ON should be approaching $1.5B of SiC revenue capacity exiting CY23 with these tools.

This should all be fine for AEHR because ON will not stop ramping their SiC revenue capacity at $1.5B, or even $2B. The problem for AEHR comes in how ON plans to further ramp their SiC revenue capacity in CY24 and beyond. Here’s what ON said on their Q322 call in November ‘22:

“To limit our long-term CapEx investments, most of the silicon carbide equipment we are installing around the world is 200-millimeter capable, and we are on track for 200-millimeter wafer qualification in 2024 and related revenue ramp in '25.”

Here is ON’s slide on their SiC capacity expansion plans, with my annotation in red: