I will explain why Aehr Test Systems ($AEHR) is significantly overvalued. There is a substantial argument to be made stressing the inevitable decline the stock will experience. It's important to note that on its own, AEHR is not a bad company. The company has a strong balance sheet and they are even profitable. However, the stock is ridiculously expensive and it's difficult to make a case otherwise. I will be going in-depth below.
AEHR is a manufacturer of products that test semiconductors. They manufacture the testers, then supply them to customers. The testers are applicable to semiconductors within a variety of markets such as the automotive industry, mobile industry, silicon carbon, silicon photonics, and memory.
To start, AEHR is trading at a market cap of $700M. The stock market is saying that this is a $700M business. Let's start by examining the balance sheet. It's $60M in assets and low liabilities leave the company with $50M in shareholder equity.
A price-to-book value of 14 is extremely high not only in the broader stock market but especially in the semiconductor testing industry as a whole. I compared AEHR to companies that also manufactured semiconductor testers to see if this multiple was warranted and found that the mean P/B among FormFactor, Teradyne, and Cohu was 3.8. These are all businesses that produce semiconductor testers, highly similar to AEHR yet are nowhere near as highly valued.
Looking at the income statement, the business has strong gross margins of around 50%. On a quarterly basis, their gross profits generally lie in the hundreds of thousands to low millions. Though profitable, they are not high enough to justify a $700M valuation. Their P/E is 70, incredibly higher than any other competitor. The average P/E for the competitors I listed above is 19. There is nothing special about Aehr’s business that would indicate they will have such unprecedented growth in the future that would warrant these high multiples. On the latest 10-Q, the company has stated that current order backlogs sit at $20M. That is good for the business in its current state but is minuscule relative to its market valuation.
The cherry on top is the massive insider selling. Members of the board including VP of Sales and even the CEO have reduced their investment significantly in recent days:
- On November 11, two members of Aehr’s board, Howard Slayer and Laura Oliphant sold 20,000 and 6,700 shares equating to $500,000 and $167,500.
- On November 15, Vernon Rogers, the VP of Sales and Marketing sold 20,000 shares, equating to $526,400 and decreasing his overall position by 20%
- On November 15, Director Gates Geoffrey Scott sold 15,000 shares for a total value of $378,150.
- On November 14 and 15, Howard Slayer sells a second time! 28,000 shares equating to $708,400!
- And on November 15, President and Ceo Gayn Erickson sells 70,000 shares equaling $1,806,000
The information speaks for itself which is why I expect the stock to decline in coming months. I will stress once again that Aehr Test Systems is a good business. Their strong balance sheet and solid profits do well in adding value to shareholders. However, it is the large discrepancy between fundamental value and current market price that makes me highly confident in its overvaluation.
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