Why Aehr Test Systems Could Be a Hidden AI Semiconductor Winner

Key Points

• Aehr Test Systems makes equipment that helps chip manufacturers produce quality products while saving money.
• Aehr's latest deal shows the company's unique value proposition to the AI-chip market.
• The deal could lead to more of the same for this stock, which one Wall Street analyst sees as a +70% upside in.

Aehr Test Systems NASDAQ: AEHR is a small-cap stock in the semiconductor industry. Instead of designing or manufacturing chips, the company uses equipment in the chip development process. The company has had a very difficult 2024 overall. Shares are down over 45% in the year as of the close of Dec. 16. All three of its earnings reports showed revenues declining 25% or more compared to the same quarter in 2023.

However, recent AI-related news is exciting investors. Analysts at Craig Hallum are likely feeling much better about the $25 price target they placed on this stock after shares soared nearly 26% on Dec. 16. The research, trading, and investment banking firm’s price target still implies shares could rise 73% from the Dec. 16 closing price.

I’ll break down what Aehr Test Systems does and the news injecting optimism into the company. I’ll close by providing my overall take on whether the stock can make good on its big potential upside.

Aehr: Saving Chip Makers From Losing Millions on Mistakes

Aehr Test Systems makes equipment that tests semiconductors during the manufacturing process. It exposes them to stimuli to see how well they function in different conditions. It performs this at multiple stages of the chip-making process, including the wafer level, singulated die level, and post-packaging stage. Wafer level refers to testing performed when all the chips are still on one large silicon wafer. The wafer is then cut up to separate the individual chips in a process called die singulation. The company also performs tests after this step to see how each chip functions on its own. Lastly, it tests the chips after manufacturers put them in their packaging. The packaging allows the chip to connect to other computer components.

The main value-add of this equipment is that it helps chip manufacturers detect problems in their fabrication process. It ensures consistent chip quality, reliability, and longevity. This is key for chip manufacturers to win customers. This testing can also save these manufacturers a lot of money. By testing chips early and often, manufacturers can correct problems and limit the number of defective chips they produce. This saves money on the use of expensive materials like purified semiconductor-grade silicon. Overall, chip testing enhances the reputation of manufacturers, leading to more customers. It also reduces production costs, leading to a more profitable business.

Along with silicon-based chips, the company’s equipment focuses largely on testing silicon carbide (SiC)-based chips. This shows the forward-looking nature of the business. SiC-based chips are often considered the future of certain parts of the semiconductor industry. Their qualities make them superior to silicon chips in applications like electric vehicles. The company’s machines can also test gallium nitride-based chips, another semiconductor material of the future.

Aehr’s AI Deal Is Worth More Than Just the Money

Aehr’s share price rocketed up on Dec. 16 after the company made a key announcement. The company has reached an agreement with a customer who will use its equipment to test and burn-in AI processors. This is the company’s first AI customer, who bought equipment worth over $10 million. That might not sound like a lot of money, but it's equal to 76% of Aehr’s revenue in Q3. Still, the big win is what this deal means for the future.

Getting its first AI customer gives the company legitimacy in the all-important space. It opens the door to further deals. Aehr says that it is the only company in the world that can offer turnkey test and burn-in solutions for AI processors at the wafer and package levels. This is a big-time competitive advantage for this firm.

Long-Term Tailwinds Mean Aehr Stock Could Just Be Getting Started

It's notable that even though Aehr is a small stock, the company is profitable. It also has hardly any debt. This gives the company the ability to take full advantage of its moat in AI-chip test and burn-in. This should be a strong long-term tailwind for the firm. One can also say the same about the company’s focus on semiconductor materials of the future.

In my view, Aehr is a company that not only has the potential to reach its price target but could ultimately surpass it. If this deal is simply the first domino to fall in Aehr’s entrance to the AI market, it could be just the beginning of the stock’s gains.