Saul's mid-month portfolio changes

Investment Analysis Clubs Saul’s Investing Discussions
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Mid-Month Changes in My Portfolio

AEHR - At the end of September I had a 20.4% position in Aehr. It was my largest position. On the 5th of October they issued quarterly results. After a lot of reading and thinking I decided it was insane of me to be carrying such a large position.

I decided to cut my position in half, then reduce my position by three quarters, then just have it as a tiny keep-it-on-the-radar position, and finally I decided to completely exit, and I sold my entire position over the last six trading days and reinvested all the money in other stocks.

I had been very enthusiastic about the company, and the earnings report was very good, so why did I change and decide to exit? I realized that very good things are PROBABLY coming in the future but that, about those good things, there is no way of knowing HOW MUCH? or WHEN? or FOR HOW LONG?

Everything was uncertainty. I didn’t even have any idea what the next quarter results would bring, and it seemed clear from the conference call that the CEO didn’t know either, and he had no idea as to when his expected customers would place orders, or how big they would be. I’m much more comfortable watching this from the sidelines, but if you decide to stay in, I wish you all the best. This company may boom and leave me in the dust, and if so, more power to it…

What did I do with the money ? Well I put a lot of it into a new 10.1% position in ELF, which has been well discussed on the board.

ELF’s yoy percent revenue growth the last six quarters has been (in percentage growth) : 13%, 26, 33, 49, 78, and 76% last quarter.

Its quarterly Adj EPS (in cents) has gone 13 cents, to 39 cents, to 36, to 48, to 42 and last quarter to $1.10.

And its Adj Gross Margin was 67% last fiscal year and 71% last quarter.

Those are the kind of numbers I can warm up to, and while there is never certainty for the future, there isn’t the kind of uncertainty I was feeling with Aehr either.

And most of the left-over money I put into a 7.7% position in Celcius (energy drinks), also well discussed on the board, which formed a distribution alliance with Pepsi Cola a little over one year ago.

Celcius’ yoy percent revenue growth the last four quarters has been (in percentage growth) : 98%, 71%, 95%, and 112% last quarter !

Sequential revenue growth was 22.1%, -5.3%, 46.1% , and 25.4% last quarter !

Adj EBITDA was (rounded off) $25 million, $13 million, $49 million, $78 million

Their gross margin last quarter was 48.8% up from 38.5% the year before.

Their Net Income last quarter was $40.9 million (apparently GAAP).

Finally a little 3.0% position again in Tesla. I decided that even if I can’t really stand their founder and CEO, I shouldn’t let that make me pass on one of the great companies of this era.

Please don’t follow me without making your own decisions. I make lots of mistakes, and I can change my mind at any time, just like I did here, but without posting it on the board until the end of the month, or perhaps not even then if I get sick or am traveling or whatever. Make your own decisions !!!

Saul

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Good gawd! I sold half my AEHR today as well. Largely for same reason. Just learned about your move now. Doing taxes tonight but will decide what to do with the rest if anything by morning. Capital gains were quite large but thanks to 2021/2022 had a few capital gain losses to buffer the blow. I know the policy on capital gain taxes on this channel and it has merit. But still, selling the rest has issues and that decision can wait until morning.

Tinker.

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Thanks for the update Saul, I’ve been trimming my position in this as well for similar reasons.

I would say on the surface the report was pretty good. However, this report does not line up with the massive enthusiasm the CEO had from the earnings report two quarters ago.

When I first read that report two quarters ago it was one of the most impressive earnings call readouts I’ve ever seen. It sounded like they were about to onboard a ton of customers in SiC, gallium, and silicon photonics. It also was implied their customer diversification was going to improve in the very near term future.

While the numbers and valuation look good currently, it’s roughly six months later and the customer concentration is still in this one customer Onsemi, with them having some of their metrics being 88% for that customer!

If the confidence of the CEO was at 100 two quarters ago, it was at maybe 80 the past earnings report, and now seems to be around 60 this report. I’m not too pleased why the CEO is imploring customers on the call to get their orders in.

I’m still pretty bullish on this company overall, I’m just not getting why the metrics are not beating their own massive expectations they set two quarters ago.

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That’s it exactly ! When we got all excited was when they sounded so euphoric about the business coming their way. They were deceived and we were deceived. Some of it may still be coming, but who knows when or how much?

Saul

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I sent a letter to IR asking if Aehr has any competition? If so, who? And, given the market response to 1Q24 earnings call, does Aehr have any insight about when they will bring new customers onboard with FOX equipment?

Here’s the reply:

Hi Peter - Aehr really doesn’t have any meaningful competition to this point as a provider of wafer level test and burn-in in volume production.

To date, only two companies are providing test and burn-in at the wafer level. These are EDA Industries in Italy and Pentamaster Corporation in Malaysia. Both are prober-based systems that are similar to functional test tools and can only test one or two wafers at a cycle, similar to Aehr’s prototype systems ten years ago and nowhere near the volume production and cost-effectiveness Aehr provides today.

There is an enormous opportunity in front of Aehr, and they are uniquely positioned to capitalize on it. Too much to go into here, but you’re welcome to give me a call and I can better address your questions. I’m available this afternoon until 5:30pm Pacific time. Otherwise, this Friday afternoon PT.

Best regards,

Jim Byers, Senior Vice President
MKR Investor Relations, Inc.
Los Angeles - San Francisco
Mobile: +1 (415) 309-2079

First thing I noticed was that Mr. Byers is a Senior VP of MKR Investor Relations. And the use of the pronoun “they” rather than “we” in the last paragraph. Apparently, Aehr has outsourced the IR function. I have no idea how common this practice might be, but it’s obviously common enough that MKR and I’m sure other firms are there to fulfill this need.

In any case, Mr. Byers invited me to call him, so I did. He really didn’t have a lot to add during our conversation.

He pretty much said stuff we all already know. Yes, there’s a big opportunity, especially with respect to automotive applications for SiC. Most of the big semi makers are adding capacity, in some cases building new facilities in support of SiC chips. As noted, Aehr has no competition with respect to burn-in testing. Burn-in testing can not be effectively performed on individual chips concurrent with functional test of the assembled and packaged chip. Failure rate in excess of nine nines (one part in a billion) is unacceptable. Due to these factors, Aehr is confident that most, if not all of the SiC manufacturers will become customers as they ramp up production.

I tried to pin him down on when Aehr expected to add new customers. While he was somewhat evasive about when Aehr will see the new customers come on board. He did say that first quarter has always been Aehr’s slowest quarter and 1Q24 was the best first quarter they’ve ever booked. He reiterated their high degree of confidence in the $100M+ guide. Their revenue is very lumpy, therefore they don’t provide quarterly guidance. He also said that Aehr will be selling equipment to new customers during FY24 and to a greater extent in FY25. He said the best way to assess Aehr’s performance is to look at it annually rather than quarterly.

So what do I make of this? Aehr is my largest position. I am not going to exit the investment as I think the opportunity will bear fruit this year and even more so next year.

But, at the same time, I’ve got too much capital tied up waiting for things to happen. I’ve not fully figured it out, but I’ll probably sell half or maybe more of my Aehr stock and use some of the proceeds to buy Aehr leaps. I’m not sure what I’ll do with the rest of the cash. Most likely I’ll beef up my positions in Celsius and possibly Elf. I may elect to just sit on more cash than I usually do.

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It was clearly AEHR’s best 1st quarter ever of the last three years and more impressive was the relative sequential performance compared to the seasonality of the last two years.

The customer concentration issue was disappointing. Part of the reason is though Tesla simply is kicking derrière’s and very few of the legacy OEM models are next generation SiC models. Thus, Tesla dominates SiC enabled EVs.

2024 is when next generation EVs are suppose to start to proliferate. Would expect chips to OEMs to start shipping. Said SiC chips need reliability. The AEHR narrative is all of them need to be wafer tested and only AEHR can do it at volume. This is blah at the IR person iterated. So maybe makes sense the Tesla/ON customer dominance at this point. But it has to change dramatically by June quarter

Yes, the talking about a customer (or multiple customers are listening to the call) and then imploring them to get their orders in was very weird indeed. Was it just misspeaking? Freudian slip out of anxiety in regard? Or a genuine desperate sales pitch?

Don’t know. This uptake from non-Tesla focused customers is really the issue that hit me though. That is the whole thesis! I’m still holding what I didn’t sell as described in my prior post.

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WOW, this made to wall street today. I was thinking the move was already baked in, but nope. Weird that Saul has taught us well enough that a few of us were already thinking this.

Unfortunately, I was over weighted somehow, so was making money on options until I figured out where the money needed to go. So, I am looking at that 10% drop today and cringing…sigh.

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At least two very bad signs for non-Tesla EVs. (1) GM “delaying” opening of their second all EV factory and production of multiple trucks they had planned, (2) Ford delaying their new battery factory for EVs and indicating that electric F150 sales have “tanked”. Cutting one shift from that factory.

All may indicate why AEHR customers have not committed if their OEM customers are cutting back from their expected EV production plans.

I sold the remainder of my AEHR holdings this morning. Market sold off today but AEHR easily sold off the most and the only stock I follow (which is about 100) that sold off on high volume.

Signs of actual recession (for real are here - ignore the rosy retail numbers and the like - backward looking) and this is part of the equation causing GM and Ford to cut back on what was a “save the planet” and “transform the company” transformation that they’ve already spent tens of billions on.

I have no doubt their EV plans will move forward but not in a recession and not until ‘25 or ‘26 now, delayed at least a year.

Hope I’m wrong here. But this is consistent with AEHR’s behavior and the market doubting the time line and forecast. Nearly 88% of their business still has Tesla as an end customer and they projected little change in that this fiscal year (which if my memory serves, they were talking some 10% customers to develop just two quarters ago or so).

Anyways, I would not sell off a Tesla or Nvidia on an ambiguous quarter but AEHR is not a company like that, which cannot keep up with demand and dominate value chains worldwide. AEHR is a small supplier dependent on Ford and GM and the like to create demand. For now that demand is slowing below expectations.

I will continue to follow as six months from now things may change but for now the sell off on AEHR does not appear to be just some profit taking or reflexive action.

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Just a note on what those dumping AEHR are characterizing as the CEO “begging” people for orders on the earnings call. That is not what I heard.

I just went back and read through it, especially the interchange between Erickson and Jed Dorsheimer.

It began with a discussion of the company that is taking its own sweet time to make a decision on a purchase, now going into three years of discussions. Dorsheimer wondered if there was light at the end of that tunnel and whether a final decision by them might result in a larger order.

Erickson responded:

I mean, generally speaking, even if customers talk about ordering lots upfront, my experience has been, it’s normally met with one or a small number of systems, say, for production to begin with and then a little bit of absorption. That might change here because they’re running out of time. And they’ve done way more evaluations than I’ve seen in the past. So I think that has a chance to collapse itself.

So, it is the undecided company that is “running out of time.” Why is that?

Erickson goes on:

…it’s getting pretty serious with companies now. They’re putting real capital in place, putting fabs in place, making commitments to these very significant ramps that are happening in the automotive guys in '25, '26.

** And I don’t think they want to be cut short.** So my message, I guess, to my customer is listening, I mean we are able to ship more than anybody else. We literally can ship up to, call it, 50, 80, 100 testers, call it, wafers or blades of capacity a month, we are shipping more per month than the combined number of installed base of every other competing alternative has ever shipped. But there’s still a scenario where please get your orders in so that we can continue to make sure that we can address everybody’s needs.

My translation of that is:

Companies are making serious financial and infrastructure commitments on their factory floors to be ready for the surge in the EV market they see coming in 2025-26. Our testing systems are key to meeting that demand, but our systems don’t appear with the waving of a wand. We can make more testers and make them faster than all the other competitors combined, but that doesn’t mean the time from order to shipment is zero, especially as we see demand ramping quickly on our end. So, get your orders in now, or you might be left without the equipment you need to compete when that 2025-26 surge hits.

Aehr may still be too small of a company for many. You may want more certainty. But I think the pile-on for Erickson reminding his customers that their manufacturing time is fast but not zero and that Aehr’s systems should be part of what they are building out as they spend capital to prepare their factories for the surge is misplaced. He is not begging for orders. He is telling customers that it takes time to get ready for what they all believe is coming. You snooze, you lose.

Aehr is now my fifth-largest position, at 10.09%, but only because of the price drop. I have added shares on this weakness.

JabbokRiver

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Hi Jabbok, I thought I was clear that, as for myself, I got out because of the UNCERTAINTY, and because of not being able to tell IF additional orders were coming in, or WHEN they were coming, or WHAT SIZE they would be, or HOW LONG THEY WOULD CONTINUE, and the CEO simply confirmed that he didn’t know either.

And all those auto companies scaling back their EV plans because they can’t compete with Tesla’s price cutting, just confirmed it further.

Best,

Saul

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Apologies, Saul, I was responding to the above quote.

JR

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In context the issue is that AEHR has been spending capital to increase inventory to get ahead of the expected demand. They already have more capacity than the $100 million “at least” they reiterated guidance for. As such, there should be no rush to get in orders before inventory is gone like with a Nvidia GPU. AEHR needs to exceed their guidance for any shortage to even begin to occur.

AEHR also made clear, as Saul reiterated, that they have no idea of demand. They have yet to book anywhere near enough demand to create even the threat of a shortage. True, they do have to design the equipment per chip design but anyone going to buy from AEHR is already in the pipeline and trialing. AEHR indicated 3x the design activity but 50% growth in revenue increase.

AEHR is not even close presently to the position NVDA is in where even Elon Musk is begging for more GPUs. This was Erickson going, “come on, you know you need it. We’ve been putting sweat, blood, and treasure in servicing your needs. COMMIT DAMN IT!”

If there was some indication of a shortage of product I’d think otherwise but there is not. Hopefully that will happen but is not even close to happening at present and so far away as to be on the verge of being too speculative to even draw a logical conclusion that this will happen this year.

Further, if I’m gonna commit I don’t want the threat of shortages over my head. I want my product and want it when I need it.

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This may also be thinking too much but Erickson stated they could deliver 100 machines a month. Correct me if that is wrong from the earnings call. A quarter is three months. Each machine (without add
ons and the like) is $2.5 million. That is $25 million a month, $75 million a quarter. $300 million a year. An ancient memory from last year remembers (maybe wrongly) that AEHR was building capacity to serve $300 million a year.

If this is accurate AEHR will be no where near to a shortage. But, one problem small companies have is creating confidence in their customers that (1) we will be here and (2) we can deliver. Erickson’s comments (since he had customers listening in - and why would customers even care…unless - AEHR is having reluctance from customers to commit because they are small and unproven. Erickson is saying “bring it on we can handle your business and we have staying power.”

At least another perspective to look at
It taking all these issues into consideration and context.

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Tinker, you’ve got your numbers wrong. 100 machines at $2.5 million is $250 million, not $25 million. Sounds way too big.
Saul

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Thank you @JabbokRiver42 for being the voice of reason here. I admit, I saw the CEO’s comments as a bad look, and maybe a bit desperate, but now I can totally see them in the way you are presenting them. My perception may have been colored by my disappointment at the reiteration (not raise) of the FY guide.

There’s an alternate universe somewhere – and sure maybe things are going better for GM and Ford and others in this universe – where AEHR received a bunch more orders than they even expected in Q1 and raised the guide to 120m or so. In that world maybe AEHR shares are sitting at $65.

Saul is of course right about the timing. We (and even the CEO) can’t know when they will get the orders. But for them to never come at all…the secular tailwinds behind SiC which some people on this board used to talk like experts about would have to disappear.

But you know what, none of that is different than before the Q1 call. We always should have known that this wasn’t a SaaS-like compounder, where they slowly build a base of recurring revenue. This might even be a company with a SiC story that just has a life cycle, and GaN/Photonics/whatever never really comes to fruition, and in 10 years they’re no longer relevant. These risks are in no way different than they were before the Q1 call. I tried to warn of these risks in those ancient times 3 weeks ago.

I don’t believe a company with these significant risks merits a large position. I was trimming each time shares approached (and even surpassed) $50 the last several months, but this week I have been adding. I’m more willing to own AEHR at $32 than I am at $52. This company isn’t worth $10 billion but it’s also not worth $0. In between, I suggest we stop overreacting, thinking that they’re either going “to the moon” or that they’re not worth holding at all.

Bear

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I fall more in line with @JabbokRiver42 and @PaulWBryant. Aehr’s price was last here six months ago, yet it’s hard to argue it doesn’t have a better outlook now than it did then. Were Erickson’s comments sloppy and/or unpolished? Absolutely, just like his wink and nod when the analyst floated $120M after Q4. As I wrote earlier, I think both were self-induced mistakes. I feel the same about a third-party IR team that emails earnings releases 23 hours after the call (despite adding more and better info to the release likely at the request of analysts).

In the end, none of that changes the general trend of a move to EV’s, strong SIC projections (including a $1B investment by somebody I can’t remember which made chipmakers jump last week), and an increased customer count which should eventually ease customer concentration concerns. While no one knows the pace of ramping, there’s no indication of any cancellations either. At some point it needs to be acknowledged this is an efficient, profitable business with no debt in a market that seems to be slowly but surely moving toward its product. What’s that worth? I don’t know. It’s up to each of us to decide for ourselves.

I cut AEHR from 12% to 10% after earnings due to the timeline change and sloppy call. Yeah, hindsight makes me wish I cut more. But at some point, this feels overdone. For me that time is now. I’ve swapped some shares into Jan’25 LEAPs and added a bit (though not all) back the last couple days. I’m currently around 9%.

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You’re right Saul. I did catch the error after the fact but didn’t change it because the point still stands. Erickson said “50, 80, 100 testers, blades a month” is the quote from Erickson. He did talk about buying inventory to stay ahead of expected demand (in prior calls and investor meetings) All of this is consistent with no chance of supply shortages and giving confidence to large customers trying to commit to small company.

So I do think given how unusual it is to state customers are listening in, that this is the problem Erickson is trying to overcome.

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One thing to chime in on here. With these types of companies, shop availability is a major concern. The operations team will focus on order book and lead time. Ultimately, capacity is the driver. All variable overhead can be flexed quite easily, but capacity constraint is a long term, structural constraint.

While AEHR is NOT capacity constrained per the comments above, the request is specifically messaging that if the forward trends are as positive as implied, capacity constraints could come to dominate the picture for lead times and deliveries.

I agree this was the wrong place to message this, but it is very indicative of the depth of nuance commanded by this founder led organization. A typical CEO would not state this in this way, but the facts and the story are well aligned here.

Results? I defer to the numbers and the forecasts already stated.

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I don’t think production capacity is or will be a problem. I wrote to IR maybe 6 or more weeks ago specifically inquiring about Aehr’s capacity. They responded that at present they were not constrained and they were actively engaged in bringing more contract suppliers on board to meet future capacity needs, although they did not say when the future would arrive, the implication was that they had laid the groundwork in order to ramp up production very rapidly.

I didn’t ask if they were prepared to off-load final production which they do in house in Freemont. However, I was left with the impressions that they were prepared to comfortably meet whatever demand that might materialize in a reasonable period of time.

They are very well prepared to anticipate how much and when that demand is likely to develop. They are well informed of the major semi maker’s plans to add SiC capacity. Those potential customers are trying to gauge their capital spending plans in order to meet their demand based on EV production forecasts.

Like any good business, the semi makers want to time SiC production just in time to deliver product when it is needed. They know what their lead time is (and so does Erickson). They’ll order Aehr equipment when it’s needed and no sooner.

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You have to also consider that solar and ev industries are highly dependent on fossil fuel pricing. high oil price creates demand for them and low oil price destroys that demand.

with all the fossil still under the earth. I see oil will be range bound and trend lower as we more clean tech adoption.

I brought this concern when ENPH was in 300s but my opinion was dismissed.