ASML (NASDAQ: ASML) is one of the world’s leading manufacturers of semiconductor manufacturing equipment. The company is the largest manufacturer of lithography systems used to optically etch circuit patterns onto silicon wafers and is the sole supplier of high-performance extreme ultraviolet (EUV) lithography systems for producing the world’s smallest and densest chips.
ASML’s monopoly on this crucial technology has allowed it to grow its revenue at a compound annual growth rate (CAGR) of 18% from 2013 to 2023. The company’s stock has soared nearly 980% over the past decade, boosting its market capitalization to $373 billion.
Image source: Getty Images.
ASML should continue to grow, but it may have a hard time replicating the gains of the past decade. Therefore, growth-oriented investors should look for smaller chip equipment makers with more upside potential. One such company could be Aehr Test Systems (NASDAQ: AEHR), a chip test equipment maker with a market cap of just $550 million.
What does Aehr Test Systems do?
Aehr makes semiconductor test and burn-in equipment. The company didn’t get much attention when it went public in 1997 at $8 a share, and its shares eventually fell to below $1 in 2009 at the depths of the Great Recession.
From fiscal year 2009 through fiscal year 2020 (ending May 2020), Aehr’s annual revenue grew at a CAGR of less than 1%. As a result, most investors likely forgot about the company until the meme stock surge of 2021.
But since the start of 2021, Aehr’s shares have soared 644%, as more investors see the company as an undervalued investment in the expanding silicon carbide market.
Silicon carbide chips can operate at higher voltages, temperatures, and frequencies than traditional silicon chips. Their durability makes them ideal for short-length LEDs, lasers, 5G base stations, military radars, and electric vehicles (EVs). According to The Brainy Insights, the global silicon carbide market could grow at an annual rate of 12% from 2024 to 2033.
But today only a handful of chipmakers, including Wolfspeed, Infineon, ON Semiconductor and STMicroelectronics, manufacture silicon carbide chips, while only a few companies, like Ayer, offer the equipment to test and bake those wafers.
How fast is Aehr Test Systems growing?
Aehr experienced a significant slowdown in fiscal 2021 as the pandemic disrupted the semiconductor market, but growth accelerated significantly in fiscal 2022 as the expanding EV market led silicon carbide chipmakers to upgrade their manufacturing capacity, with that tailwind continuing through fiscal 2023.
The story continues
metric
Fiscal Year 2020
Fiscal Year 2021
Fiscal Year 2022
2023
2024
Revenue Growth
6%
(26%)
206%
28%
2%
Operating Profit Margin
(11%)
(twenty five%)
17%
twenty one%
15%
Data source: Aehr Test Systems.
Aehr’s growth slowed in fiscal 2024 as the EV market cooled and some customers faced tough macroeconomic headwinds. Analysts expect Aehr’s revenue to grow at an 18% compound annual growth rate from fiscal 2024 to fiscal 2026 as the cyclical downturn ends.
Ayr CEO Gain Ericsson said in the company’s latest earnings call that the silicon carbide market remains a “significant opportunity” and “will continue to be a significant contributor to revenue this year and beyond.” Ericsson also noted that the company is “seeing growing demand” for test and burn-in equipment in the artificial intelligence (AI) accelerator market.
But can investors really compare Aehr to ASML?
While Aehr is an interesting way to benefit from the long-term growth of the silicon carbide market, it is unlikely to scale and evolve into the next ASML. There are two reasons for this.
First, Aehr may face intense competition in the semiconductor test and burn-in equipment market from larger, more diversified companies, such as Applied Materials Inc. and Tokyo Electron Inc. This pressure could limit Aehr’s ability to expand its business and grow its gross margins.
Second, there is no indication that Aehr will be able to dominate the market with its own technology. By comparison, ASML took 30 years to develop EUV technology, only delivering its first EUV systems in the early 2010s.
Investors are optimistically assuming Aehr can grow earnings at 15% annually from 2024 to 2034. The company’s future price-to-sales multiple will remain stable, and its market cap will grow to just $550 million to $2.1 billion in the final year, which would be nearly four times earnings from the current share price but nowhere near ASML’s earnings over the past decade.
So while Aehr Test Systems could benefit from long-term growth in the silicon carbide market, it won’t be mentioned in the same breath as ASML, Applied Materials, or Tokyo Electron anytime soon, and it should remain a much more speculative investment than those larger semiconductor equipment manufacturers.
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Leo Sun invests in ASML. The Motley Fool invests in and recommends ASML, Applied Materials, and Wolfspeed. The Motley Fool recommends ON Semiconductor. The Motley Fool has a disclosure policy.
Is Aehr Test Systems the next ASML? was originally published by The Motley Fool.