Aehr Test Systems: Semiconductor tester bucking a downturn
The semiconductor business is a cyclical one, and right now it seems to be on the rinse cycle. A soft market in the first half of this year is washing out some of the profits of the chipmakers, and the weakness is trickling down to the companies that supply them with the equipment to make and test the chips.
An exception, however, is Aehr Test Systems (Nasdaq: AEHR), a Fremont, Calif.-based seller of semiconductor test equipment that has been largely ignored until recently. It offers two new test systems that are more efficient than anything else on the market, and are especially good at testing popular flash memory chips. One customer, at least, is buying the new gear and subsequently boosting profits.
In the second fiscal quarter ended last November, Aehr reported revenues of $9.7 million, up 56% from a year earlier, and up 26% sequentially. Pro forma net income, at $1.6 million, is up 83% from a year ago, and 62% sequentially.
The stock price has risen about 40% since earnings were announced on Jan. 7, but the company is still ignored by many investors. At just under $8 during trading on Friday, share prices were up nearly 30% from a year ago. Shares have traded between $5.41 and $8.27 over the last 52 weeks. Ramesh Misra at Collins Stewart (which makes a market in Aehr stock and expects to seek investment banking business from the company in the next quarter) is the only analyst currently covering the stock. Misra thinks that’s because large investors have no interest in small volume stocks and their banks have dropped coverage. But he believes that Aehr’s customer base is likely to expand soon, and will “boost its image among investors.”
Misra has a target price of $12, about 10 times his FY09 (May) earnings estimate of $1.15 per share. It’s currently trading at about 7.6 times his earnings estimate of $1.04 per share for calendar year 2008, still making it a bargain. (Credence is currently trading at 36 times its forward P/E, even though it’s dropped about 70% in the last year.) In his Jan. 8 report, Misra wrote that Aehr is “among the few semi-equipment stocks that is downright inexpensive.”
There are two factors that point to continued growth for Aehr. The first is the new test equipment, which now accounts for the majority of Aehr ‘s revenues. The Fox-1 tester, which it started selling in late 2006, is the only device on the market that can test every chip on a state-of-the-art 300-mm flash memory wafer at once, before they’re sliced into individual chips.
That cuts the cost of testing, especially for flash memory chips. Data stored on a flash chip can be accessed very quickly (hence the name), but writing the data onto the chip is very slow compared to other memory chips, making it time consuming to test them. Previous testers can test just 10 chips on a wafer at a time.
Aehr announced a $13 million follow-on order for the device early in the quarter. So far, all orders for the system have come from one customer, most likely Spansion Inc. (Nasdaq: SPSN), a former joint venture between Fujitsu Semiconductor and Advanced Micro Systems, which co-developed the testers with Aehr. In addition to the system itself, customers need to buy $300,000 “wafer-packs” to connect the tester to the wafer — and they need a different wafer-pack for every type or size of chip they want to test.
Aehr also announced it shipped the first unit of its newest tester, the Fox-15, to an automotive chip maker on Jan. 7. The Fox-15 will both test and “burn in” chips, heating them to high temperatures to make sure they won’t fail after installed in a hot product. Revenues from this system will be recognized within the next two quarters.
The second favorable factor is that the market for flash memory chips is expanding. They’re the chips used to store pictures in your digital camera, but as their storage capacity increases, they are starting to replace the whirring disk drive that holds the operating system and other software in laptop computers. They’re still much more expensive than disk drives, but are faster and lighter, generate less heat and consume far less energy, significantly prolonging the battery life in laptops. Drive makers are starting to offer hybrids, a combination of standard disk drives and flash memory. Some pricey laptops have already eliminated disk drives, relying entirely on flash chips.
When flash chips hold all your software, they had better be thoroughly tested before going into your computer. Previously, flash chip testers have relied on statistics, testing only a high enough percentage of them to indicate a low probability of failure. By contrast, 100% of critical chips like microprocessors are tested. “That kind of customer requirement is coming for flash as well,” says Misra.
The caveats are that Aehr is still heavily dependent on one customer, and the semiconductor equipment business is unpredictable, prone to recessionary trends in the overall economy.
But Misra believes that it will have at least one more customer before the end of 2008. He predicts that the systems will also start being used to test other types of chips, including analog (non-digital) chips and ubiquitous DRAM (dynamic random access memory) chips, since they cut the testing time.
If so, Aehr (AEHR) will prove to be a stock on which investors may still clean up.
About the Author
Richard L. Brandt is a journalist and author with more than 20 years' experience covering science, technology and business.
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