AEHR is a beneficiary of the switch from Silicon-insulated gate bipolar transistor (Si-IGBT) to wide-bandgap Silicon Carbide MOSFETs for electric vehicles components, such as traction inverters, DC/DC inverters, on-board chargers, fast chargers and energy storage applications. 

Please reference our previous analysis on AEHR here.

The result in switching to Silicon Carbide (SiC) is that charging is quicker and the range of miles for electric vehicles increases with SiC. MOSFETs are metal oxide semiconductor field effect transistors that has three terminals to switch and amplify voltages in circuits. Si-IGBTs are inefficient, oversized and have trouble achieving pure sine wave voltage requirements whereas Silicon Carbide can withstand and manage high voltages. This is a good fit for electric vehicles which have high-voltage batteries. 

One of the key differences is the switching frequency with MOSFETs able to exceed switching frequency values of greater than 200kHz which allows the currents to start flowing with less of a delay. This is a 10X higher switching frequency value than IGBTs at 20kHz. MOSFETs are also bidirectional which means current flows both controlled forward and uncontrolled backward/reverse. 

MOSFETs have lower switching losses which is important for electric vehicles. SiC MOSFET’s reach an efficiency of 98.5% and reduces power losses by up to 38% when compared to IGBTs. Wolfspeed’s 1.2 kV SiC MOSFET has been proven to reduce power losses by up to 40% and increase power density by 50%.

Both MOSFETs and IGBTs are used to switch and amplify voltages. IGBTs are used for over 1000 volts and high current applications whereas Silicon MOSFETs are used for less than 250 volts and low current applications. However, when you replace silicon with silicon carbide, the breakdown strength increases 10X and can operate at higher temperatures and provide higher current density. 

SiC devices offer 3X more thermal conductivity and allow for faster heat dissipation. As silicon devices become smaller, it’s more difficult to extract the heat from the electrical conversion process. 

By replacing silicon with silicon carbide in MOSFETs, the low switching losses and higher switching frequencies are retained. Due to the durability of silicon carbide, MOSFETs are now also able to handle higher voltage at lower heat. Notably, silicon carbide combines silicon with carbon and is the third-hardest substance in the world. The durability of silicon carbide is also ideal for the various conditions electric vehicles must operate in and the design is also more compact. 

Section Takeaway: By withstanding higher temperatures combined with lower switching losses and lower thermal resistance, silicon carbide (SiC) can handle more power while using less energy. SiC reduces the power consumption and reduces the size of power supply systems that require high-voltage conversion, which makes SiC especially compatible with electric vehicle (EV) on-board chargers and solar photovoltaic power systems. 

In the words of AEHR’s CEO: “Industry leading semiconductor suppliers like our lead silicon carbide customer, tout key differentiators of silicon carbide over the silicon based IGBTs, which are insulated gate bipolar transistors that include silicon carbide its higher system level efficiency owing to the greater power density, lower power loss, higher operating frequency and increased temperature operation.”

Tesla’s Silicon Carbide Inverters

Electric vehicles use three types of electronic units for energy conversion: DC/DC converters to power low voltage electronics, DC/AC traction inverters to drive the electric motor and to supply power to the wheels and AC/DC converters for recharging vehicle batteries including regenerative braking and at charging stations. 

Electric vehicles are 60% to 73% efficient at transforming battery energy through electric motors compared to ICE powered cars at 35% to 25% efficient. With that said, maximizing efficiency remains the top priority in the EV industry. Silicon carbide helps to further the effort by providing longer ranges and smaller batteries. 

The traction inverter is most critical as it determines how long vehicles can run until the next charge. Every EV also has an onboard charger (OBC) for power conversion that converts alternating current from charging stations to direct current. The OBC market is estimated to reach $10.8 billion by 2027.  

Tesla was the first to adopt silicon carbide for the 2018 Model 3 by working with ST Microelectronics to add SiC MOSFETs to an inverter design. The result was a more compact, lighter inverter at 4.8Kg compared to Si IGBT inverters that weigh 2-3X more (8kg to 12kg). 

“Tesla made this fantastic move,” said Claire Troadec, an analyst at Yole Développement, a high-tech research and consulting firm in France, referring to the company’s switch to silicon carbide. “What they did in a year and a half was really amazing.” – New York Timesreferring to the company’s switch to silicon carbide. “What they did in a year and a half was really amazing.” – New York Times

Pictured below, the main roadblock to SiC MOSFETs adoption is cost yet this was largely solved for as the second-gen Tesla’s SiC inverters, which analysts believe are now comparable to Si-IGBTs. Not only is the SiC inverter on par in cost but is known to be one of the best on the market at 97% efficiency, resulting in more range. This was accomplished without increasing battery capacity.

Source: IDTechExIDTechEx

According to analyst Dorsheimer from Cannacord Genuity, what helps to drive down costs is the end-to-end optionality, with up to 300 pounds of copper wiring removed (7% of vehicle weight), and by shrinking the size of the inverter, this in turn needs less cooling, and can result in a smaller cooling system. 

Charging Solutions

Silicon dominates computers and other electronics where a low voltage is required, such as 1.5 volts. However, the wide band gap of silicon carbide is better suited for batteries and systems that handle thousands of volts. The resistance to the flow of electrons for SiC is 2,000X less than silicon, which according to Canaccord Genuity, means a SiC needs 1/10th the area of silicon to manage the same voltage. SiCs have a higher frequency and also doesn’t leak due to opening and closing faster.  

Internal combustion engines offer a typical 400-mile range whereas most EVs deliver between 200 to 30 miles. Companies like Tesla and Lucid Motors are now offering models that go just over 400 miles or 500 miles, however, charging time can be a roadblock to EV adoption.  

Silicon carbide helps to lower charging times for onboard chargers to 12-15 minutes with 80% capacity. The 400-V Supercharger by Tesla offers 324kW up from 250kW whereas SiCs can offer up to 400kW. The higher power is achieved through lower switching losses which results in shorter charging times. Due to fewer components being required for cooling, the chargers are also smaller. 

Beyond EVs …

Chips are being transformed to not only process information but to also manage energy. The addressable market extends beyond only electric vehicles although the competitiveness in this field is responsible for placing silicon carbide in the spotlight. We have also covered AEHR’s exposure to the silicon photonics market for data center interconnects in our past analysis with a summary provided below. 

The electrification of technology includes photovoltaic solar, wind turbines, all electric transportation including semis, trains, buses, motors for factories and also HVAC systems in houses and buildings. Enphase has gone so far as to say “it’s the end of the road for silicon” – referencing the upcoming change that is expected in the solar industry, for example. It is widely accepted that all electric vehicles will convert to silicon carbide.

Addressable Market is Small

The global silicon carbide market is projected to grow from $2.95B in 2021 to $7.79B by 2030, at a CAGR of 11.4%, while the global electric vehicle market is expected to grow faster at a CAGR of 18.2%, from $163.01B to $823.75B by 2030.

The addressable market for all silicon carbide-based power electronics is $20 billion per year. Of this, the automotive market is expected to grow from $1 billion to $5 billion by 2027. 

I believe the biggest risk is not the switch from silicon to silicon carbide, rather what this is worth in terms of revenue. 

Silicon Carbide-Related Stocks

Wolfspeed is the pureplay in terms of design as the company was the first on record to produce a SiC MOSFET. The company recently opened a $1 billion silicon carbide fab and is partnered with General Motors to increase range for its fleet of EVs. The gross margin on SiC will be in the mid-thirties until 2024 when it will rise to a 50 percent gross margin. At scale, the profit margin is 36%. The stock is moving 20% as I write this with a series of price upgrades from analysts who believe “demand is outstripping supply” with “30%-40% upside to its FY26 revenue target.” WOLF is the supplier for Lucid Motors 670 horsepower electric motor and GM. 

 ON Semiconductors will see flat year-over-year revenue in 2023 yet recently announced $1 billion in incremental SiC revenue that is expected to “support the stock” next year. The note we have from an analyst is this: “Therefore, based on ON management's previous guidance of quadrupled silicon carbide output by the end of FY2022 and a $1B revenue run rate from late 2023 onwards, we may expect ON to report revenue CAGR growth of over 9% from FY2024 onwards, which will bring its revenues to a more optimistic estimate of $9.3B then, indicating a 9.7% upside from current estimates.” ON is the supplier for Tesla and has $4 billion in committed spend through 2025.

There are others yet those two are the most notable at this time. 

How Does AEHR Fit In?

AEHR has two main product lines: testing equipment for silicon carbide chips called “FOX” testing systems with the latest model called “FOX-P” and replacement and consumables products called “WaferPak” and “DiePak.” 

As was pointed out in the original analysis, this is similar to the printer and ink sales model or the razor and razor blade model. The WaferPaks and DiePaks are the higher margin business with expectations that the sales of these consumables will be 4X the level of its test systems.

The testing equipment is necessary to ensure the reliability of silicon carbide devices. The stakes are high should an electric vehicle or solar panels fail in the field, considering not only the costs involved with these products ($50,000+ for EVs, $10,000+ for solar systems) but it also protects the reputation of a particular brand in a competitive environment. AEHR’s testing equipment provides the necessary step of quality assurance. The testing equipment is also used to increase battery life before going to market. 

Here is the apt description from the original analysis:

“Aehr has a unique technology that is just now starting to ramp called FOX-XP test systems, which are used for wafer level burn-in testing of silicon carbide and silicon photonics. 

The main advantage of wafer level burn-in testing is that it reduces “infant mortalities”, or early failures in semiconductor equipment. Burn-in testing attempts to lower the failure rates from stage 1 of the “bathtub curve” (shown below), which increases the reliability of semiconductors. 

Wafer level burn-in testing reduces chip failure, which is critical in certain industries such as EVs, 5G and datacenters […] The high costs of chip failures in EVs is driving the industry to push to zero failures and wafer level burn-in testing helps to achieve this. 

“Bath Tub Curve” Representation of Chip Failures

Source: ScienceDirect

CEO Erickson explained further on the Q1 call that he anticipates “that wafer level test and burn-in will become the industry standard for quality and reliability screening of silicon carbide devices.” 

He added that Aehr’s patented technology allows “customers to screen devices that would otherwise fail after they are packaged into multi die modules, where the yield impact is 10 times or even a 100 times as costly. With the most cost effective solution in the market to address this opportunity, we believe that Aehr has the chance to achieve a significant, perhaps dominant market share for silicon carbide wafer level burn-in.” 

The 10x to 100x yield benefit awarded to early adopters can lead to a rapid acceleration in orders of Aehr’s test systems, since competitors will need to also adopt the new technology or risk falling behind. Here is what AEHR said on the most recent earnings call last month:

“This allows our customers to burn-in every single device at a lower cost than they could in any other form due to our ability to contact 1000s of devices on a single wafer and test 18 wafers in a single system with our FOX-XP multi-wafer test and burn-in system and proprietary FOX Full Wafer Contact WaferPAKs.”

Notably, AEHR’s pipeline is growing yet its early days for this company. The first lead customer began placing orders in July 2021 which is when there was a significant change to the company’s trajectory. Here is what we know about that customer: 

“In July 2021, CEO Erickson announced that the company’s lead silicon carbide customer had finally qualified Aehr’s FOX-XP test systems for “high-volume production” for wafer level burn-in testing for electric vehicles” […] and the July 2021 order was with a “leading Fortune 500 supplier of semiconductor devices with a significant customer base in the automotive semiconductor market.”

Financials

AEHR has reported triple digit growth for many quarters yet is guiding for 51% revenue growth next quarter for $8.52 million, up from $5.65 million in the year ago quarter. Last quarter the growth was 166% for $20 million. The cyclicality is due to being a newer pipeline that should even out with consumables sales (WaferPak and DiePak) over time. Notably, AEHR was hit especially hard during Covid with a streak of steep, negative YoY revenue growth from May of 2020 to February of 2021 ranging from (13%) to (75%).

The company recently ended its fiscal year 2022 in May with the full year results available in the July 19th earnings report. The FY2022 revenue grew 206% to $51 million and is expected to grow 22% in FY2023 to $62 million. The growth is clearly decelerating yet AEHR relies on orders for its revenue guide and as more orders come in, the revenue is further adjusted. Therefore, this the 22% is likely a base case with details provided on the earnings call on the new orders they are expecting (ref. below). According to analyst consensus, AEHR is expected to accelerate in FY2024 to 59% growth for revenue of $99 million.

The company has a gross margin in the most recent quarter was 52% and the company addressed why it was lower in the previous quarter at 42%: “The increase in gross margin from both the preceding third quarter and Q4 of last year is primarily due to a decrease in unabsorbed overhead costs to cost of goods sold related to higher revenue levels in Q4. Because our manufacturing overhead costs are relatively fixed relative to revenue levels. Our gross margins increased significantly with increasing revenues where our fixed costs are basically spread over the larger revenues […] As Gayn noted, with the high revenue we're generating, we're seeing this significant leverage in our operating model to our bottom-line, as evidenced by the strong growth in gross profit.”Because our manufacturing overhead costs are relatively fixed relative to revenue levels. Our gross margins increased significantly with increasing revenues where our fixed costs are basically spread over the larger revenues […] As Gayn noted, with the high revenue we're generating, we're seeing this significant leverage in our operating model to our bottom-line, as evidenced by the strong growth in gross profit.”

Regarding the comment on the operating model, the company had a banner quarter in this regard with operating margin of 28% which is significantly higher than previous quarters at 15%, 7.5% and (18%), respectively. Stock based compensation is minimal with GAAP net income of $5.8 million and adjusted net income of $6.5 million.

Earnings per share in the recent quarter was $0.20 versus $0.02 in the year ago quarter and adjusted EPS of $0.23 versus adjusted EPS of $0.04 in the year ago quarter. 

Free cash flow in the fiscal Q3 ending in February filing (note: the most recent fiscal Q4 ending in May has not been filed yet) was ($3.02) million with operating cash flow of ($2.94) million. For the nine-month period ending in February, the free cash flow was $2.06M with operating cash flow of $2.28M.

The company issued equity in October of 2021 which added $25 million in cash to the balance sheet. There is $31 million in cash on the balance sheet, working capital of $49 million, and no debt. 

Total bookings for FY22 were $60 million. About one month into FY2023, the company has $16.8 million in bookings. As you can see above, the quarters are lumpy across AEHR’s key metrics. Our entry last year was based on many things including bookings up 263% QoQ to $40 million and backlog up 21,500% QoQ. We aren’t afforded this clear, rapid growth across the key metrics at this time yet Fiscal Q1 has the $16.8 million per these two press releases on Aug 17 for $4 million and July 19 for $12.8 million.

Here’s the more bullish-leaning comment made on the call regarding bookings: 

“Our lead customer for silicon carbide wafer level burn-in made significant investments in their silicon carbide production throughout this past fiscal year. 

Today, we're excited to announce that we received $12.8 million in new orders from them for multiple FOX-XP systems, a high-volume production wafer pack aligner and a small number of WaferPAK full wafer contactors to meet their increased production capacity needs for silicon carbide-based power semiconductors for the electric vehicle market. All of this is expected to ship by the end of our fiscal third quarter ending February of 2023.

This adds to the backlog of systems that we're shipping to them this fiscal year or fiscal quarter actually. In addition to the system capacity order, we expect significant subsequent orders for wafer packs needed for the system orders announced today, and they will ship at approximately the same time as the systems.”

About one month later, the company announced the $4 million in wafer packs which helps build trust that more orders will be announced soon to be considered “significant.”  

The CEO also said the following regarding potential new orders: “We've recently completed a wafer stress benchmark with yet another of a large — the current large suppliers of silicon carbide with excellent results. They have told us that the FOX platform is the only solution that can scale to meet the production capacity needed to address the silicon carbide device growth, particularly for electric vehicle applications.

As a result of all these positive evaluations, we believe that we will receive orders from at least several new silicon carbide customers and begin shipping systems to meet their production capacity by the end of our current fiscal year that ends May 31, 2023.”

And, there was more … the CEO also stated:

“In just the last month, we received WaferPak orders for new devices from a couple of our Silicon Photonics customers. And we're expecting customers to resume buying in the current fiscal 2023 and 2024. Several customers addressing the silicon photonics market have forecasted additional FOX systems and WaferPAK or DiePAK contactor capacity needs over the next 12 [months].”

Potential Catalyst Discussed on the Call:

The company discussed an important catalyst on the call, which is that EV traction inverters are moving to multi-chip modules: “We are currently engaged in discussions with most other current and future silicon carbide suppliers. The major silicon carbide companies expect that most EV traction inverters will move to multi-chip modules. As such they have told us that they must move to wafer level stress and burn-in to remove the extrinsic failures before they put these known good die into multi-die modules to meet their cost, yield and reliability goals of these modules.”

Note on Valuation:

AEHR trades in-between its silicon carbide/automotive related peers at a forward P/S of 6.5. Wolfspeed is trading at a 10 forward P/S and ON Semiconductors is trading at 3.5 forward P/S. When AEHR received new orders last year, the valuation peaked at 12-13 Forward P/S. 

The current PE Ratio of AEHR is in the top quartile of semis at 50. AEHR is a small cap and doesn’t compare well to its peers on a free cash flow basis as this sector tends to be very cash efficient. With that said, AEHR is more attractive than Wolfspeed with positive free cash flow in the low single digits (YTD) compared to Wolfspeed’s ($665) million from the company’s report from yesterday. ON Semi has free cash flow of $1.25 billion so not apples to apples.

Silicon Photonics

In addition to the orders and customers discussed above, Inphi/Marvell is also a customer of AEHR. I believe they are referencing this company when they stated in the most recent earnings call: “Our lead Silicon Photonics customer that is one of the world's largest semiconductor manufacturers continues to use Aehr for wafer level burn-in and stabilization of their Silicon Photonics wafers. During the last year they added a significant number of additional FOX NP systems to support the characterization and product qualification of new photonics-based devices. This customer is expected to purchase new sets of wafer packs to be used with these systems. And as the applications and market for silicon photonics-based devices continues to grow. We expect this customer as well as our other customers in the space to continue to increase their capacity in the future.”

As discussed in the previous analysis, Silicon photonics are being used to increase communication speeds, which is critical for edge computing as it links 30-megawatt data centers within a 120 km distance to function like a 120-megawatt data center. This enables 100G Ethernet services for cloud operators and enterprises. Microsoft and telecom operators are both customers of Inphi’s silicon photonics.

We’ve owned Inphi in the past, and currently own Marvell, the company that acquired Inphi. The importance of silicon photonics is discussed at length in this past analysis for Inphi and also Marvell/Inphi here. Most recent Marvell analysis is here with this key takeaway:

“When the COLORZ ZR 400G launches, it has the ability to become a critical supplier for data center interconnects and the converged edge of telecom and cloud connections.”  it has the ability to become a critical supplier for data center interconnects and the converged edge of telecom and cloud connections.” 

The time has arrived for the ramp in COLORZ 400G ZR. Management explained on the Q4 call that it expects datacenter revenue (its largest segment) to increase more than 100% YoY driven by the “strong ramp” in its 400-gig ZR datacenter interconnect products, which is termed COLORZ II.”The time has arrived for the ramp in COLORZ 400G ZR. Management explained on the Q4 call that it expects datacenter revenue (its largest segment) to increase more than 100% YoY driven by the “strong ramp” in its 400-gig ZR datacenter interconnect products, which is termed COLORZ II.”

Addressable Market

The global silicon carbide market is projected to grow from $2.95B in 2021 to $7.79B by 2030, at a CAGR of 11.4%, while the global electric vehicle market is expected to grow faster at a CAGR of 18.2%, from $163.01B to $823.75B by 2030.

The addressable market for all silicon carbide-based power electronics is $20 billion per year. Of this, the automotive market is expected to grow from $1 billion to $5 billion by 2027. The semiconductor market can move very slow at times and this is evidenced by silicon carbide’s expected market size by 2027. Therefore, the material is very promising, yet it’s important to remember that we be careful as to how we participate as the market size is small compared to other semiconductor markets (for example, AI chips are expected be in the trillions by 2030 which we’ve covered many times including here).

In AEHR’s case, the company also participates in the photonics market for a CAGR of 49% compared to a CAGR of 10% in the automotive industry. The market is small with expectations of reaching $1.2 billion by 2026, yet AEHR’s largest customer is Inphi/Marvell, who is a leader in this market.

Perhaps most importantly, AEHR is in the wafer market even more so than being directly in the silicon carbide market. The company stated the following on the most recent earnings call: “The silicon carbide market for electric vehicles and its supporting infrastructure requirements are growing at a tremendous rate with Canaccord Genuity estimating that wafer capacity will increase from 150,000, 6-inch wafers in 2020 to 2021 to over 4 million 6 inch equivalent wafers in 2030 just to meet the electric vehicle market alone. This represents growth of over 25 times the wafer starts just for electric vehicles. They also forecast another 4 million 6-inch equivalent wafers to address other markets, such as industrial and solar power conversion.”

Risks:

The risks resemble those of most small caps, which high customer concentration and little history in terms of revenue and profits. For the risk adverse investor, mid to large cap semis will result in a lower risk investment choice. 

Despite the last 9 months being less hospitable to small caps, we often take moonshots and have done quite well with these in the past. To date, LINK is our best performing position and AEHR and INPHI were both very successful positions, for example. However, we fully accept the risk that is involved and our readers should be clear on their risk tolerance. 

Without something unexpected happening with the orders, the supply chain remains AEHR’s largest risk, in my opinion. Here is what the company stated on the call:

“I also want to emphasize that we purchased additional material and have a supply chain in place to significantly grow beyond our revenue guidance for the fiscal year. We will have better visibility in the second half of the fiscal year and exactly what that looks like. And once we get closer to understanding the actual capacity needs and requests of our customers, we'll provide an update.”

Conclusion:

Due to AEHR being a small cap, technical analysis will be in lock-step with fundamentals. A less risk adverse investor could wait for more announcements around the new orders. Wolfspeed had a strong report yesterday with comments that supply outstrips demand and a 30% to 40% increase in FY2026 revenue. Given Wolfspeed’s strong report yesterday, we feel timing is much better on AEHR for our purposes for fiscal year 2023 (ending in May) and we expect to put a fair amount of focus on this position over the next 12 months.

Knox has a buy plan so please follow along with his trade alerts, webinars and forum posts as we continue to eye this position.