Last year, the I/O Fund reinitiated a position into AEHR and published a deep dive entitled: “AEHR Analysis: The Silicon Carbide Revolution.” This is a must-read for anyone new to our site. Currently, the position is up over 100% YTD and is second only to our Nvidia position, up 170% YTD. Notably, Aehr was also the primary winner for the portfolio in 2022, based a series in entries beginning in August.

ON Semiconductor is Aehr’s number one customer. We wanted to take a look at ON to see if it has a place in our portfolio. This analysis also helps to provide a 360-degree view of the silicon carbide market.

As a refresher on silicon carbide, below are some notes from an analysis we published in August.

Recap of why Silicon Carbide, also known as “SiC,” is disrupting Silicon-insulated gate bipolar transistors (Si-IGBTs):

The result in switching to Silicon Carbide (SiC) is that charging is quicker and the range of miles for electric vehicles increases with SiC. 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.

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.

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.

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). Published in the New York Times: “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.

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

How Aehr Fits In:

Aehr provides the testing equipment 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.

Aehr has a unique technology called FOX-XP test systems, which are used for wafer level burn-in testing of silicon carbide and silicon photonics. As stated, ON Semi is the number one customer for Aehr’s test systems and wafer paks.

To learn more about Aehr, please reference the following analysis:

• Aehr: Silicon Carbide Revolution
• Aehr Deep Dive 2021
• AEHR Fiscal Q3 Earnings
• AEHR Fiscal Q2 Earnings

ON Semiconductor: Powering the EV Highway

Summary:

ON Semiconductor provides the silicon carbide MOSFETs (which are semiconductors that switch or supply voltages) for electric vehicle components for EV drive trains, such as traction inverters, DC/DC inverters, on-board chargers, fast chargers and energy storage applications.

ON is Aehr’s number one customer because they must test silicon carbide semiconductors for failures before supplying silicon carbide-based powertrains and charging systems for key Electric Vehicle OEMs, such as Tesla, Volkswagen, Mercedes Benz, Nio and BMW.

EliteSiC is the portfolio of SiC products that ON provides to popular EV OEMs to increase electric power train efficiency and extend EV range. Of the estimated $8.13 billion in revenue that On Semi is expected to report this year FY2023, $1 billion is from silicon carbide components. This is up 5X from 2022. In Q1, the SiC revenue doubled from Q4.

Here is where the other $7 billion in revenue comes from:

• Intelligent sensors used in automotive ADAS systems, which are abundant in Level 1+ autonomous vehicle systems.
  Note: ON Semi has the #1 global position in image sensors with a 46% market share in Autos and 68% market share in ADAS. This particular segment accounts for 69% of total revenue, up from 64% in the year ago quarter.
• Smart factory automation and robotics
• Energy infrastructure, such as EV charging stations
• Retail applications, such as for surveillance or doorbell cameras
• Cloud and 5G infrastructure

The company has been ambitious in vertically integrating the manufacturing process to reduce dependencies. For example, ON Semi acquired GT Advanced Technology in 2021, a SiC manufacturer, which eliminates the need to rely on a partner to source SiC. The company also acquired a 300mm fab from Global Foundries to strengthen its imaging sensor business. Both facilities are located in the US and also benefit from tax credits from the CHIPS act. 

What’s Driving Growth:

The key markets underpinning the growth in the Intelligent Power and Sensing businesses are the Automotive and Industrial sectors which comprise over 75% of total revenue. Of which Auto is 50% and Industrial is 28%. Importantly, the similarity in customer requirements – increased power and efficiency – provide engineering and product development synergies between the two businesses.

In the chart above, ON expects to grow 3x the market and forecasts an average sales growth of 10-12% from 2022 through 2027.

Intelligent Sensing

Within Intelligent Sensing, this Advanced Driver Assistance Systems (ADAS) schematic from Spiceworks demonstrates the impact car electronification has had on car safety with the radar, light detection and ranging (LIDAR), cameras and embedded ultrasound technology. 

In Image Sensors, ON has the #1 global position in autos and industrials. It has a 46% market share in Autos and 68% in ADAS.  Below are examples of cameras embedded on ON chips used in automotive and industrial applications.

The quality (i.e. megapixels) and integration of these sensing technologies is one of ON’s key advantages. For example, it can operate at lower temperature operation, has reduced cooling requirements and weighs less.

In addition, the range and ability to function in low light environments are also differentiating factors. This is how ON has described the market drivers: “We introduced our new Hyperlux Family of image sensors to support the transition to eight megapixel devices where ASPs (average sales prices) can be up to 2.5 times that of one or two megapixel image sensors.” 

ON was the first to market with 8 megapixel automotive-grade sensors that provide both high detection range and a wide field of view, delivering consistent performance across all temperature and lighting conditions. Based on this industry-leading dynamic range, dark noise performance and LED flicker mitigation feature of its sensor, ON has been winning new designs. Last year ON displaced the large incumbent at local Japanese automotive OEMs.

In addition, one of the primary drivers of increasing number of cameras per car has been the efforts by traditional OEMs to match the ADAS and related safety features offered by the new EV models. For example, ON secured a design win for a digital mirror that incorporates four cameras for the rear and outside views. This mirror overcomes obstructions caused by passengers, headrests and other objects and provides integrated rearview and side view for blind spot monitoring.

In industrial end markets, growth is driven by industrial and warehouse automation applications where ON has 27% market share. ON’s image sensors are used for scanning in industrial and warehouse applications. This growth is driven by expansion and increased automation of warehouse by global e-commerce leaders. Customers include Amazon on warehouses and Schneider, Siemens, ABB and Honeywell in factories.

ON is the only image sensor supplier with internal and external capabilities across every manufacturing stage of the supply chain for automotive and industrial sensors.

Intelligent Power

Within Intelligent Power, ON’s key product is its Silicon Carbide technology. In Silicon Carbide and Silicon power, ON has #2 Global position with 9% market share.

Beyond traction inverters for electric vehicles, the SiC solution can be applied across several different end markets where AC/DC or DC/DC power conversion is needed including high speed trains, photovoltaic converters, medical equipment, motor drives, electric power transmission and solid state transformers.

ON’s EV customers require SiC technology that meets two basic requirements, greater range with less weight. Take for example, ON’s EV clients such as Tesla and VW. They require SiC technology that will provide greater efficiency, increased voltage and greater power density, which reduces charging times and increases driving ranges between charges.

ON has a broad portfolio of product solutions to meet EV maker needs.

ON’s EliteSiC and VE-Trac module solutions provide the foundation for traction inverter design, making automotive products more powerful and reliable. Main traction inverters are the heart of electric vehicles and provide incredible amounts of torque and acceleration. The responsiveness of the inverter and the electric motor it controls correlate directly to the “feel” of the vehicle and consumer satisfaction.

Power levels from 40 kW to 250+ kW are common, and these systems require extremely robust IGBT and silicon carbide (SiC) components. Scalability, enhanced thermal performance, and the low packaging inductance allow ON’s traction inverters to achieve peak efficiencies, state-of-art power density, and swift response times.

EV makers seek increased range and reliability but with less size weight in their SiC requirements. ON is currently on M3 silicon carbide technology and is developing M4 and M5.  The key is that each new generation is able to reduce the size of the cell but increase the amount of current that goes through it.

The packaging around the Die is also very important. The packaging has to effectively allow heat to be extracted from the Die, through the packaging and into the fluid and be able to operate at higher temperatures. For example, ON’s gel-based Case Modules are a good choice for applications up to 150 degrees Celsius. However, EV based SiC based modules require packaging such as Transfer Molded that can function at 200 degrees Celsius. By reducing thermal resistance, this enables more power, efficiency and better range at a lower cost.

Importantly, it weighs less. For example, a gel-based Case Module weighs 5 lbs., while a metal Dual Side Transfer Molded weighs 50% less but with higher power performance at higher temperatures. This reduces the weight of the vehicle. ON recently developed polymer-based package which weighs 90% less than the metal based. Packaging solutions can be “mixed and matched” depending on the need.

Longer-Term Supply Arrangements (LTSA)

As part of ON’s strategy, it seeks to enter into longer-term supply arrangements (LTSA) with strategic end-customers. Typically, they last from 4 to 5 years. LTSA’s provide a level of visibility on pricing and volume through the duration of the arrangement. 

Coupled with the value-added products that ON is providing, these arrangements typically lead to a more stable pricing environment. ON provides a quarterly update on the level of LTSAs which provides a good proxy of future growth.

ON ended q123 with $17.6B in LTSA’s, of which about $4.5b is silicon carbide related. To provide some context, ON’s 2022 revenue was $8.3bn.

Importantly, the LTSA’s provide a roadmap as to when and how much to expand capacity. Rather, than building capacity with the hope that they can fill it. ON can now build capacity to fulfill its LTSAs. This reduces the margin volatility inherent in the “build it and hope they will come” model. In addition, it has helped ON to provide accurate profitability guidance to wall street analysts.

Per management on the earnings call:

“LTSAs also help reduce our exposure to the volatility in the consumer and computing markets. Volkswagen as an example, signed a three-year agreement for more than 100 current production devices giving them the required supply chain sustainability with a major semiconductor partner, our committed revenue through LTSAs increased again in Q1 by $1 billion.”

Key Earnings Driver: Increasing ON Content Per Product

The key to ON’s earnings and continued growth will be the increase of its semiconductor content in automotive and industrial applications in its key growth markets as well as in units shipped.

Below is a diagram showing the typical ON content in a higher end German EV. Silicon Carbide, Silicon Power components and Power ICs are supplied by the Intelligent Power division. While Sensor Interfaces and Image Sensors are supplied by Intelligent Sensing.

Currently, the value of ON content for electric vehicles ranges from $350-$1,800, depending on the type of car.  As EV penetration increases, ON will continue to benefit both from the increase in content per car and the number of EV cars made. Importantly, the former helps reduce the cyclicality of the latter (i.e. Auto Sales SAAR).

Per the earnings call: “We also lead the market in automotive ultrasonic sensors with more than 20 sensors in one of the latest EV models from a leading European OEMs.”

An important factor to point out is that the cost of ON’s content relative to its client’s overall costs for its product is fairly small. The costs of ON’s EV components are only about 2.7% of the total COGS for an EV manufacturer while the Advanced Safety components are a bit less than that, compared to $40,000 total COGS for an EV maker. Yet, the importance to the operation and quality of the car is much more valuable than that. This should provide ON a healthy level of pricing power in its LTSAs.

Recent Acquisitions

GTAT acquisition

In November 2021, ON completed its acquisition of Hudson, New Hampshire based GT Advanced Technologies, a manufacturer of Silicon Carbide (SiC).

With GTAT, ON is now vertically integrated and can provide end-to-end power solutions from SiC crystal growth to fully integrated intelligent power modules. ON is the only integrated device manufacturer that grows its own silicon carbide and silicon boules.

This vertical integration enables ON to maximize production efficiency between the 3 facilities. Since the acquisition, substrate production is 10x higher, die up 12x, internal packing 4x, yields 1.7x and new product 3x.

East Fishkill Fab – Global Foundries

ON is the only image sensor supplier with internal and external capabilities across every manufacturing stage of the supply chain for automotive and industrial sensors.

In February 2023, ON finalized its acquisition of Global Foundries’ 300 mm fab in East Fishkill, NY (EFK) which will enhance its competitive position by enabling the conversion of ON’s wafer processes from 200mm to 300mm. The fab increases the processing capabilities required for image sensor production.

Management/CEO:

Hassane El-Khoury has been CEO since December 2020. Prior to that, he was the President and CEO of Cypress Semiconductor before its sale to Infineon. Since joining, he has increased ON’s focus toward higher growth/higher margin markets, price maximization across its product offerings and increased vertical integration.

CEO El-Khoury spearheaded the transition and divestment from sub-scale factories overseas into a lighter internal fabrication model with the goal of reducing gross margin volatility while at the same time making strategic acquisitions, such as the GT Advanced Technology acquisition and the East Fishkill Fab acquisition from Global Foundries – actions all with an eye toward increasing gross margins while reducing margin volatility inherent to the sector.

So far, CEO El-Khoury has a track record of saying what he will do and doing what he says. In doing so, he has built credibility with the investment community and Wall Street. Since December 2020, ON has outperformed the SOX by 140% and 250% outperformance compared to Wolfspeed through May 2023. 

ON has characterized 2023 as a transition year, mainly due to integration of its acquisitions and divestment of its non-core assets. We see 50%+ valuation potential when this transition is completed by 2h23 (see more on valuation below).

Financials:

ON Semi had a streak of strong revenue growth in the 20% range that has recently flatlined to the single-digit negative growth expected for the remaining quarters this year. The expectation is that ON Semi returns to growth in FY2024 at 7.5% revenue growth.

EPS returns to growth in FY2024, as well, at +11.74% for $5.43 EPS. This compares to (-8.77%) EPS decline in FY2023 to $4.86.

Margins:

Gross Margin has been in the 49% range yet has currently dipped to 46.8% in the most recent quarter. The guidance is for 45.4% to 47.4%. This is a much better margin than competitor Wolfspeed in the 30% range.

The operating margin was 28.8% last quarter and net margin was 23.6%. This is also much better than competitor Wolfspeed, a company with double digit negative profit margins.

ON has guided for gross margins to be lower in 2023 vs 2022. ON has characterized 2023 as a transition year on the path toward a resumption of higher margins.

The main headwinds are:

• Continued elimination of 10-15% of sales (~$700m) from non-core/lower margins businesses first announced at the end of 2021 to be concluded by 2023
• Lower fab utilization to manage inventories at its EFK facility
• Start-up costs related to its SiC Hudson and facilities which will weigh on margins 

Ultimately, silicon carbide components are helping margins yet the East Fishkill fab is weighing on margins. Per Management, the headwinds are temporary: “Based on our current outlook, we are confident we can realign the cost structure of the fab and drive efficiencies to recover by early 2024.”

Cash Flow:

Last year, ON had an operating cash flow margin of 31.60% and a free cash flow margin of 19.60%. This margin has been fairly consistent until this quarter when it dropped to 20.90% for op cash flow and 4.50% for free cash flow margin. There is $2.7 billion in cash on the balance sheet and $3.46 billion in debt.

The free cash flow is softer from “lost” net income from higher inventory, or in other words, the elimination of sales.

Per management, regarding inventory increasing QoQ: “Inventory increased by $198.1 million sequentially and days of inventory increased by 23 days to 159 days. This includes approximately 43 days of bridge inventory to support fab transitions and the impending silicon carbide ramp. We continue to proactively manage distribution inventory, decreasing inventory in the channel by $79 million sequentially and at historically low levels with weeks of inventory at 7 weeks, compared to 7.3 weeks in Q4.” 

Management also stated they are directing “a significant portion” of capex toward silicon carbide and the 300mm capabilities of the East Fishkill fab. 

Key Metrics:

Last quarter, the automotive business grew 38% year-over-year to $986 million yet was flat QoQ. The YoY growth is in line with the year ago quarter, also at 38% growth YoY. The company guided to automotive being “positive” quarter-over-quarter in the upcoming quarter. 

Industrial grew 2% in the March quarter to $556 million in revenue while the “Other” category declined (-39.3%) from $687 million to $417 million. 

Here is a breakdown of the revenue segments:

Valuation:

ON Semi is trading higher than its historic average on the top line. The PS Ratio is 4.6 compared to 5-year average of 2.56.

The PE Ratio of 20.89 is lower than the 5-year average of 30, yet notably this valuation has been range bound in the 16-20 range since early 2022.

ON’s valuation is not demanding relative to the market and semiconductor sector indicating that the market has not yet looked past 2023. Once the market gets indications that the 2023 year of transition is almost over, it can begin to focus on 2025 eps estimates and the 50%+ valuation potential.

Per the table below, currently, consensus is modeling $4.86 (2023), $5.43 (2024), and $6.39 (2025). At the moment, the earnings potential is 31% from 2023 to 2025. The 2023 estimates were negative y/y at the beginning of the year but they have increased post the better than expected q123 and the analyst day. So, the positive eps revisions (albeit the absolute eps is still down y/y) are a positive factor. 

Our goal for an entry would be to see 50% upside in price from $86 to ~ $130. The rationale is that once ON gets through the 2023 transition, analysts will turn toward the 2025 valuation based on $6.39 2025 EPS where currently it trades 14x. Putting 20x multiple on that gets you to around $130 (before discounting).

At the investor day, ON gave targets out to 2027 with ON guiding for operating margin expansion from 35% to 40% by 2027.

Earnings Call:

Question on East Fishkill dragging on Margins: 

“On the gross margin side of things. It seems like there were quite a few moving parts, especially the East Fishkill and on the silicon carbide side, but the net of it all seems be right in line with your plan. Can you just talk a little bit about those moving parts? East Fishkill is more expensive, but silicon carbide is ahead of plan. Does that still net out to the same trajectory through the rest of the year? Just walk us through those puts and takes and maybe the utilization side as part of that as well, please?”

Thad Trent, CFO:

“Yes. So the utilization dropped in the quarter from about 74% to 71%. We expect, kind of, what we're seeing right now is utilization to stay in that range plus or minus for the remainder of the year. Obviously, if there's a second-half recovery, we can ramp up quickly. You nailed it on the rest of it silicon carbide performed better-than-expected, EFK cost as I said is coming in significantly higher than we expected. You can think about these as being, kind of, orders of magnitude more dilutive than what we expected.

The good news is we are absorbing that. As I said, we're finding additional opportunities to improve gross margin across the company and we're able to absorb that. We believe by the time we get into 2024, we've got the cost structure of EFK back in line to where we would expect it to be. So we're really confident in the margin outlook for this year, I don't think anything changes. I think if we look at Street consensus for gross margin for 2023, even with these headwinds, we think we can execute to that — those expectations.”

Question on When the Company Will Return to Growth:

“Yes, thank you and congratulations as well on great results in a tough environment. Just a quick question on the automotive market, you mentioned Hassane, a modest inventory digestion in the end market and then you're also kind of reducing distribution inventory. Can you talk a little bit about the overall demand picture for automotive. I know it's hard to kind of separate the significant ramp that you're seeing in electric vehicles and in turn silicon carbide. But just curious if there's a softness in the demand market, if there's a shift away from high-end to mid-range, any kind of color on the automotive market will be appreciated?”

Hassane El-Khoury:

Yes, look. We don't see a big disconnect into demand. It was like I said, it was a momentary thing where we use this opportunity to kind of reposition the inventory that we have externally and we'll get back to growth in the second quarter and through the year giving us an increase in our automotive revenue year-over-year. 

Question on Lead Times at the Company:

Question:

Anyway, can you just give us a little update and some color on the shortages and the lead time situation? I guess for Hassane, our shortage is pretty much exclusively in the automotive business or are they elsewhere? And then there any point in time this year where you think the shortages will go away?

Hassane El-Khoury 

Yes, look, so the — for me, I always refer to shortages as technologies, because they're across all markets where we provide them. High voltage silicon is of course constrained technology for us. We ramped capacity, yet the demand is much higher than even our increased capacity. And for that business, for example, it goes into automotive and it goes into industrial specifically in our alternative energy. And as Thad said, that's ramping very nicely this year after a very stellar ‘22 ramp that we talked about last year. So that is technology that is constrained. We have some intelligent power technologies that are constrained. Think about it as mixed signal analog where demand in automotive and demand in industrial both have been increasing ahead of the capacity we've added.

Past Performance:

At the end of 2021, ON provided medium term financial targets. In particular a 45% Gross Margin target by 2025, exiting 10-15% (~$700m) of non-core revenue by 2022-2023 and optimizing manufacturing to increase profitability.

By the end of 2022, ON had reached and exceeded those 2021 profitability targets ahead of schedule. In particular, gross margins reached 49%. In doing so, ON has been establishing a track record of saying what they will do and then doing better than that which has helped management build credibility with the market as reflected in the stock’s performance.

From 2020 to 2022, ON’s revenue growth was 26% CAGR and Gross Margins improved by 1,310 bps and free cash flow increased significantly.

In their Q123 earnings report, ON provided an update on the current environment.

“In Q1 alone, these results allowed us to nearly double our Q4 revenue and more than half of our 2022 full-year revenue. We are on track to grow our revenue to $1 billion in 2023 and that's approximately 5 times the revenue of 2022 setting ourselves up for leadership in the silicon carbide market with the majority of the substrate sourced internally.

Demand for electric vehicles, ADAS and energy infrastructure remained healthy amid a broad-based macroeconomic slowdown. While our automotive revenue increased 38% year-over-year, it was flat quarter-over-quarter. We are still supply constrained across several automotive technologies, while in some other technologies, we are cautiously monitoring inventory digestion.”

Investor’s Day and 2027 Targets

Following the May Q123 earnings call, ON held an investor day later in the month.

ON provided new financial updates through to 2027. A gross margin target of 53% based on 1) product mix, 2) estimated growth rate of 10-12% from 2022 through 2027 in its Automotive and Industrial markets 3) contribution from SiC and 4) manufacturing efficiencies and cost savings.

Per an analyst note, the 10-12% annually through 2027 is three-times the semiconductor industry growth.

ON also guided for operating margins to go from 34.7% to 40% in the same time period.

How does this impact the short and medium term profitability?

Taking into consideration these moving pieces, we can look at the impact on Wall Street consensus estimates. In 2022, ON had sales of $8.33b and normalized EPS of $5.33. In 2021, sales were $6.74b and normalized EPS of $2.95.

For 2023, analysts are forecasting sales of $8.13 and normalized EPS of $4.86, reflecting the exiting of non-core sales, lower profitably from start-up costs and decline sales in its non-auto/industrial related businesses. After the 2023 transition, estimates begin to increase in 2024 (Sales $8.74b and EPS $5.43) through 2025 (Sales $9.65b and EPS $6.39). 

The y/y decline in quarterly eps impact from the 2023 transition year appears to be well reflected in analysts’ estimates in the chart below, with an improvement starting in 2024. In Q1, management stated they can meet analysts’ 2023 gross margin expectations.

Revenue estimates paint a similar picture.

What to do from here?

Over the past month, quarterly earnings estimates in 2023 through 2025 are being revised up on the back of its new 2027 financial targets and better than expected Q123 execution, particularly in SiC, which was a catalyst for the recent positive price action.

ON has done a very a good job of guiding the market on a quarterly basis. In the past six quarters, ON has exceeded Wall Street expectations. If this pattern continues in 2023, this could continue to be a positive catalyst for the stock price. 

For the remainder of 2023, ON will likely continue to effectively manage Wall Street earnings expectations. While analysts will look for signs that the 2023 transition year is close to reaching the inflection point.

Conclusion

Management deserves credit for implementing smart strategic initiatives and making acquisitions to vertically integrate to capitalize on the secular trends of electrification, automotive ADAS, alternative energy infrastructure and factory automation to position itself as a long term winner.  

Although this will impact profitability in 2023, the progression starting in 2024 through 2027 is significant. Importantly, management has done a credible job of explaining the roadmap to analysts and has consistently reached its quarterly targets. Since 2020, the management team has delivered on its strategic and earnings goals.

The valuation does not price in much expectations beyond the 2023 transition year. We expect management to continue its track record of effectively managing wall street quarterly eps expectations for the remainder of the year. Once analysts believe the transition is nearing its completion, likely sometime in 2h23, the focus will shift to 2024 and 2025 earnings potential.

Recommended Readings:

• AEHR Fiscal Q3: Strong Earnings Report, All Eyes on Next Fiscal Guide
• AEHR Q2 FY 2023 Earnings Plus Silicon Photonics and Inventory/Capacity
• TSM Q1 23 Earnings Review
• ASML: Monopoly on Extreme Ultraviolet Lithography
• Tesla – Post Q1 23 takeaways
• Electric Vehicles: Premium Analysis
• AEHR Q2 FY 2023 Earnings Plus Silicon Photonics and Inventory/Capacity