Why Aehr Test Systems Rallied Today

Shares of Aehr Test Systems (NASDAQ: AEHR) rallied today, rising 9.3% as of 11:52 a.m. ET, defying the broader tech market, which was down significantly.

Aehr announced its first-ever order for gallium nitride (GaN) chips today. This order represents an expansion of Aehr's addressable market, which management had predicted. That in turn lends credibility to Aehr's management and thus optimism for the company's future.

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A gallium nitride win

This morning, Aehr put out a press release saying it had secured an order for its Fox WaferPak Aligner testing machines for a customer's GaN chips. GaN is a novel material that offers higher power conversion efficiency than traditional silicon. While not quite as efficient as silicon carbide (SiC), it is also less expensive to produce, making GaN a solid choice for certain applications like fast chargers for consumer electronics as well as some parts of vehicles, data centers, and solar voltaic systems.

Aehr has had a highly concentrated customer base, with one customer accounting for a huge portion of its sales for testing SiC chips. While the use of SiC in electric vehicles and industrial applications will probably grow over the long term, Aehr's management has long been promising more diversification of both customers and applications.

Aehr rose back in early December when it announced its first-ever order for testing of an artificial intelligence (AI) accelerator. With today's announcement, Aehr can say it's not just a pure SiC and electric vehicle (EV) play but a more diversified company with customers producing SiC, GaN, and AI chips.

Aehr has regained credibility

The back-to-back wins in AI accelerators and GaN give management some credibility and have stoked optimism about its long-term plans. Aehr foresees expansion into other types of chips, such as silicon chips for use in photonics.

Aehr's valuation looks expansive today at over 9 times sales, which is high for a hardware company. However, trailing revenue accounts only for SiC customer revenue in an EV downturn. Therefore, Aehr's future sales should look much better.

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Billy Duberstein and/or his clients have positions in Aehr Test Systems. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.