For those new to AEHR, please reference Recommended Reading for product thesis, previous earnings coverage and more. All of our Must-Read Theses for the I/O Fund Portfolio are located here.are located here.
AEHR is the rare small cap that has top line growth coupled with bottom line strength. We recently discussed what comprises a defensible portfolio in tech in our Q3 Kickoff webinar. AEHR fits the criteria we outlined in the webinar, and has seen a high allocation at times in our portfolio because of how many boxes it ticks. It’s both the consistent revenue growth andand the bottom-line growth that causes this stock to defy the odds.
AEHR has seen a ramp in demand over the past three years because silicon carbide is replacing silicon in electric vehicles. 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). SiC inverters offer 97% efficiency, resulting in more range, and this is achieved without the need to increase battery capacity.
As also pointed out in our previous write-up, 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.
Financials:
AEHR will be going through a few quarters of rapid growth.
Revenue:
- This quarter, the company is expected to report revenue of $19.3 million, for growth of 80.4%. The next few quarters are also expected to be strong on growth (see below).
- Fiscal year estimates have remained unchanged since the last earnings report at 58.4% growth for $102.9 million in revenue. Management provided guidance for at least $100 million in revenue, or 50% YoY growth.
Notably, the next two years look stable for AEHR at 55% growth expected in FY2025 and 42% growth in FY2026. There are only two analysts covering the stock for FY2025, and only one analyst covering the stock in FY2026. However, it helps to see there isn’t a sudden drop off in growth expected (as of now). There was a downward revision of 17% over the last month for the upcoming quarter, however, with fiscal year estimates remaining steady, it’s a matter of this revenue being recognized later in the year.
Pictured Above: AEHR is approaching a few quarters of rapid growth
EPS:
EPS of $0.23 in the last quarter beat expectations by 7%. In the upcoming quarter, the company is expected to report EPS of $0.16. Overall, earnings will nearly double in FY2024, per management guidance of “GAAP net income of $28 million for at least 90% earnings growth.” As growth investors who want defensible companies this is music to our ears.
Margins:
As stated, AEHR is one-of-a-kind in terms of being a small cap tech stock with strong margins.
- Gross margin last quarter of 51.5%. This can be impacted by 1-2% based on product mix and freight costs. Overall, it’s been ticking upward and has been in the low 40% and mid 40% range a few times over the past eight quarters.
- Operating margin last year of 20.6% has seen stellar margin expansion from 15.4% for the previous fiscal year. The operating margin last quarter was 25.3%.
- The company pays stock-based compensation of 3% for an adjusted operating margin of 27.4%.
- Net margin grew 380 basis points last fiscal year to 22.4%. The net margin for the quarter was 27.4%.
Cash Flow:
Operating cash flow has been lumpy overall but was very strong last quarter for 800% growth to $5.87 million. This led to a cash flow margin of 26.4%. However, this is unusual. The previous op cash flow margins were 3% and 15.4% in FY2022 and FY2023, respectively.
Similarly, the free cash flow margin last quarter of 21% was higher than usual. For previous fiscal years, the FCF margin trended at 2% in FY2022 and 13.3% in FY2023.
This helped the company’s cash position grow 52% in the most recent quarter to $47.9 million. The company has no debt.
The company has also been exercising at the market (ATM) offerings. The company sold $7.9 million worth of shares in the third quarter and expects to sell shares worth $17.7 million in the upcoming fiscal year.
Key Metrics:
The company has been increasing its inventory in anticipation of heightened demand. The inventory stood at $23.9 million last quarter, for an increase of $2.3 million. Per the January earnings call: “We are increasing inventory to support our expected growth in the second half of fiscal 2023, and we continue to purchase inventory to ensure adequate supply to meet current customer and future customer market demand.”
Bookings in the fourth quarter were $15.2 million, up from $4.4 million in the year ago quarter. These are lumpy but can cause the stock to move quite a bit during a good quarter. What we want to see is FY2024 exceed FY2023, which was at $87.7 million. The highest quarter in company history was fiscal Q3 ending in February at $33.3 million.
Last earnings call, management stated there was more than $15 million in bookings received in the first six weeks of Q1. Let’s see if this quarter can meet or exceed the company’s previous record of $33.3 million. This has led to an effective backlog of $40 million.
Backlog is also lumpy at $24.5 million, up 121% last quarter. As long as these trend upward, the lumpiness is to be expected. In the previous quarter ending in February, the backlog was $31.6 million.
What to Watch For:
Bookings and Backlog are important for this stock. As stated, these can be lumpy but have been trending at historical highs for the company.
AEHR received an order on September 18th that will likely be discussed on the call. The order will be filled by end of calendar 2023. According to the press release, this is an initial order from a new customer. The customer is “a US-based multibillion-dollar semiconductor supplier serving several markets including automotive, computing, consumer, energy, industrial, and medical.”
Look for AEHR to increase its number of customers as we move along over the next few quarters. According to a Craig-Hallum analyst, AEHR may be engaged “with up to two dozen” potential SiC customers.
We’ve been reporting for quite a few quarters that H2 2023 is expected to be strong for the automotive supply chain. Let’s hope this materializes. In the January call, this was stated: “And as we had — if you look at the amount of capacity that everybody’s talking about to hit in 2025 calendar-wise, most people are just really focused on second half 2023 and into 2024 is where just a lot of capacity is coming online and so it may be less to do with the timing of us as the timing of that silicon carbide ramp. And our goal is to get qualified before that ramp happens and have a ton of capacity and material on hand to be able to address it.”
Additional catalysts are silicon photonics and gallium nitride, which have been covered in the recommended reading below.
Recommended Reading:
Product Thesis:
AEHR: The Silicon Carbide Revolution – read this for our investment thesis
Original Analysis in 2021:
Deep Dive on AEHR – more information on our investment thesis
Earnings Coverage:
Fiscal Q4 Earnings: Strong Top Line, Strong Bottom Line
Fiscal Q3 Earnings: All Eyes on Next Fiscal Guide
Fiscal Q2 Earnings: Silicon Photonics and Inventory/Capacity – read this for why AEHR is outperforming its competitors.
AEHR Customer:
ON Semiconductor: Powering the EV Highway
Our next quarterly webinar with analyst Beth Kindig will be held the week of October 16th. Details will be sent via email.
Portfolio Manager Knox Ridley’s next Positions Report will hit your inboxes October 5th. Keep an eye out for his thoughts on AEHR and other positions the I/O Fund owns headed into earnings. In this webinar replay from last week, he also discusses AEHR.webinar replay from last week, he also discusses AEHR.