Could Aehr Test Systems Become the Next ASML?

ASML (NASDAQ: ASML) is one of the world's most important semiconductor equipment companies. It's the largest producer of lithography systems, which are used to optically etch circuit patterns onto silicon wafers. It's also the only supplier of high-end extreme ultraviolet (EUV) lithography systems for producing the world's smallest and densest chips.

ASML's monopolization of that crucial technology enabled it to increase revenue at a compound annual growth rate (CAGR) of 18% from 2013 to 2023. Its stock has soared nearly 980% over the past decade and boosted its market cap to $373 billion.

Image source: Getty Images.

ASML should continue growing , but it could be tough to replicate its gains from the past decade. Therefore, growth-oriented investors should probably seek out smaller chip equipment makers that have more upside potential. Could one such company be Aehr Test Systems (NASDAQ: AEHR) , a maker of chip testing equipment that only has a market cap of $550 million?

What does Aehr Test Systems do?

Aehr produces semiconductor testing and burn-in equipment. It didn't attract much attention when it went public at $8 a share in 1997, and its stock eventually tumbled below $1 during the nadir of the Great Recession in 2009.

From fiscal 2009 to fiscal 2020 (which ended in May 2020), Aehr's annual revenue rose at a CAGR of less than 1%. As a result, most investors likely forgot about the company until the meme stock rally in 2021.

But since the beginning of 2021, Aehr's stock has surged 644%. Its shares rallied as more investors recognized it as an underappreciated play on the expanding silicon carbide market.

Silicon carbide chips can operate at higher voltages, temperatures, and frequencies than traditional silicon chips. That resilience makes them well-suited for short-length LEDs, lasers, 5G base stations, military radar, and electric vehicles (EVs). According to The Brainy Insights, the global silicon carbide market could expand at a compound annual rate of 12% from 2024 to 2033.

Yet only a handful of chipmakers -- including Wolfspeed , Infineon , Onsemi , and STMicroelectronics -- currently produce silicon carbide chips. Meanwhile, only a few companies like Aehr provide the equipment to test and burn in those wafers.

How fast is Aehr Test Systems growing?

Aehr suffered a major slowdown in fiscal 2021 as the pandemic disrupted the semiconductor market. But its growth accelerated significantly in fiscal 2022 as the expansion of the EV market drove more silicon carbide chipmakers to upgrade their manufacturing capabilities, and those tailwinds persisted throughout fiscal 2023.

Data source: Aehr Test Systems.

In fiscal 2024, Aehr's growth decelerated as the EV market cooled off and some of its clients faced tougher macro headwinds. From fiscal 2024 to fiscal 2026, analysts expect Aehr's revenue to climb at a CAGR of 18% as the cyclical downturn ends.

In its latest earnings press release, Aehr CEO Gayn Erickson said the silicon carbide market still represented an "enormous opportunity" and would "continue to be a key contributor to revenue in the current fiscal year and beyond." Erickson also said there was "growing demand" for testing and burn-in equipment in the artificial intelligence ( AI ) accelerator market.

But can investors really compare Aehr to ASML?

Aehr is an interesting way to profit from the secular expansion of the silicon carbide market, but it probably won't expand and evolve into the next ASML for two reasons.

First, Aehr could still face intense competition in the semiconductor testing and burn-in equipment market from bigger and better diversified companies like Applied Materials and Tokyo Electron . That pressure could prevent Aehr from scaling up its business and expanding its gross margin.

Second, there's no indication that Aehr can monopolize its market with a unique technology. By comparison, ASML developed its EUV technology for three decades before it finally delivered its first EUV systems in the early 2010s.

Even investors optimistically assume Aehr can increase its revenue at a compound annual rate of 15% from 2024 to 2034 as its forward price-to-sales ratio holds steady, its market cap would only grow from $550 million to $2.1 billion by the final year. That would nearly be a four-bagger gain from its current price, but it wouldn't come close to matching ASML's returns from the past decade.

Therefore, Aehr Test Systems could benefit from the long-term growth of the silicon carbide market, but it probably won't be mentioned in the same breath as ASML, Applied Materials, or Tokyo Electron in the foreseeable future. It should also remain a much more speculative investment than those larger semiconductor equipment makers.

Leo Sun has positions in ASML. The Motley Fool has positions in and recommends ASML, Applied Materials, and Wolfspeed. The Motley Fool recommends ON Semiconductor. The Motley Fool has a disclosure policy .