For Every Seller There’s a Buyer

Not every disaster du jour is a true disaster.

Source: Library of Congress

Not so funny story (to me, at least.)

I was going through the monthly quant screens I get from Kailash Concepts the other day, looking for new Red Flag Alert ideas...

There was one that stood out: Aehr Test Systems, which makes test equipment for silicon carbide chips used in EVs. Not only did it land on three of Kailash’s screens – which often signals – but it ranked 1554 out of 1555 small/mid-cap names. Typically, a rating that low suggest a stock will underperform for 12 months, which is saying something for Aher, which already has lost more than half its value since September.

Aher stock two years

As I often do, I ran Aehr plus a few other names past a friend/source who is an active investor, and who has a history of shorting stocks… but who also has a solid long book and does deep field work. To my surprise, he shot back that he was long it... and thought it was a buy.

Given who he is, and how thorough his research usually tends to be, I passed on including it as a Red Flag... instead opting for another one or two that I may mention in the not too distant future.

The Low Point

Which gets to the “not so funny (to me, at least)” part of this story...

Today Aehr’s stock tumbled nearly 17% after reporting disappointing guidance, making it a candidate for disaster du jour. Imagine how that went over with me! It’s never fun to miss one, especially when I could have red-flagged it just ahead of the news. So I turned back to my pal, reminding him how he was a buyer. As it turns out, he bought more at lower prices.

We hopped on the phone and he calmly went through his reasons. This is where I was reminded that for every seller there’s a buyer, even if the reason to sell sounds (on the surface) so compelling.

In this case, he thinks the stock’s decline today is classically Wall Street not seeing beyond the past and what’s put in front of them. Or as he put it...

Every stock has a low at some point in time. This should be the last bit of the bad news. From here, data points should get better.

Looking Ahead

The way he sees it, Aehr could have been red-flagged for any number reasons, notably customer concentration: It gets 80% of its sales from ON Semiconductor. But it also took a hit from slowing auto sales, especially EVs, as interest rates have spiked.

That led to an overflow of chip inventory, thanks to hoarding by auto companies, who believed their own press clippings that EV demand was going to skyrocket. When it didn’t, chips piled up and chipmakers didn’t need to buy new test equipment. As a result, they deferred sales.

As my friend says...

We’re 24 months into the hoarding of semis. These problems are burning themselves out..

Everything is pointing to the bottom of the cycle because as rates go lower, affordability improves and besides, car OEMs have to keep making cars.

The question isn’t what’s happening now, but what will the world look like in 12 to 24 months?

Aehr itself made a point of saying its customers – including “a very large” new customer – haven’t changed their long-term plans.

‘Progress Isn’t Stopping’

And that’s the point. Again, my friend…

It’s not that they’re losing their technological edge or anything. I would argue this is the bottom and every silicon carbide manufacturer will to move to their approach.

He adds…

Progress is not stopping, its delayed. The future is just as good, but slow coming.

Or too slow for Wall Street whatever Wall Street was expecting.

Moral of the story: Like any non-fraud, unless there is a fundamental flaw of technological obsolescence, it’s really a matter of timing, patience and the stomach to handle days like this.

Meanwhile, While EV Sales are Stalling at Home…

Finally, one interesting tidbit from CEO Gayn Erickson on the earnings call regarding the EV glut...

A lot of the things you hear in the U.S. with respect to, why people should or shouldn't adopt EVs is just not the case outside of the U.S. and particularly in Asia and in China. Chinese EVs have exploding growth with big suppliers like BYD and NIO and others. 

We're actually shipping where we know we're testing products that are going into the Chinese market today. So they are being tested in China, right. But they're actually being tested on our systems and shipped to it.

 A lot of the silicon carbide, if not the majority, is still being supplied outside of China into China. But we see that changing over time as there's a lot of players getting into the Chinese market for silicon carbide, a lot of them in the – in the wafering itself, but also in devices.

In the last quarter, we've had some pretty active conversations with some of the big Chinese suppliers, who candidly are asking us to participate and to engage with them more directly.

And we've been having some conversations related to how can we protect our IP there, what would that look like, etc. And we are working on some strategies that –I'm not trying to keep them from our shareholders. I'm just trying to keep them from our competitors. So we're keeping those close to our chest. But expect some movement there over the next quarter.

Sounds like a pothole – a big one, but a pothole nonetheless – to me. At 7x my pal’s 2026 earnings per share estimates, he’s willing to chance others, cracked rim an all.

If you liked this, please click the heart below. And if you disagree (or agree) don’t hesitate to comment.

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DISCLAIMER: This is solely my opinion based on my observations and interpretations of events, based on published facts and filings, and should not be construed as personal investment advice. (Because it isn’t!) I do not own any stocks mentioned here.

Feel free to contact me at herb@herbgreenberg.com. You can follow me on Threads @herbgreenberg.