As of September 15, 2023, Aehr Test Systems (AEHR, Financial) has experienced a daily loss of -4.27% and a 3-month gain of 10.16%. With an Earnings Per Share (EPS) of 0.5, the question arises: is the stock significantly overvalued? This article will delve into a comprehensive valuation analysis of Aehr Test Systems (AEHR) to answer this question.
Company Introduction
Aehr Test Systems is a leading player in test systems for burning-in and testing logic, optical, and memory integrated circuits. The company has been instrumental in meeting the increasing quality and reliability needs of Automotive and Mobility integrated circuit markets. This has resulted in additional test requirements, incremental capacity needs, and new opportunities for the company's products in package, wafer level, and singulated die/module level test.
When compared to the GF Value of $19.48, the company's stock price of $46.39 suggests that the stock might be overvalued. The company has a market cap of $1.30 billion and sales of $65 million.
Understanding the GF Value
The GF Value is a proprietary valuation method that offers a fair value estimate of a stock. This estimate is based on historical trading multiples, an internal adjustment factor based on past returns and growth, and future business performance estimates.
When a stock's price is significantly above the GF Value Line, it is likely overvalued, and its future return might be poor. Conversely, if it is significantly below the GF Value Line, it is likely undervalued, and its future return might be higher.
Given its current price of $46.39 per share, Aehr Test Systems (AEHR, Financial) appears to be significantly overvalued. As a result, the long-term return of its stock is likely to be much lower than its future business growth.
Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's essential to review a company's financial strength before deciding to buy shares. Aehr Test Systems has a cash-to-debt ratio of 7.6, which ranks better than 68.11% of 900 companies in the Semiconductors industry. Based on this, GuruFocus ranks Aehr Test Systems's financial strength as 8 out of 10, suggesting a strong balance sheet.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. Aehr Test Systems has been profitable 4 over the past 10 years. Over the past twelve months, the company had a revenue of $65 million and Earnings Per Share (EPS) of $0.5. Its operating margin is 20.59%, which ranks better than 82.84% of 944 companies in the Semiconductors industry. Overall, GuruFocus ranks the profitability of Aehr Test Systems at 4 out of 10, which indicates poor profitability.
Growth is probably one of the most important factors in the valuation of a company. Aehr Test Systems's 3-year average revenue growth rate is better than 86.42% of 869 companies in the Semiconductors industry. However, Aehr Test Systems's 3-year average EBITDA growth rate is 0%, which ranks worse than 0% of 772 companies in the Semiconductors industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Aehr Test Systems's return on invested capital is 48.58, and its cost of capital is 23.83.
Conclusion
In conclusion, the stock of Aehr Test Systems (AEHR, Financial) shows every sign of being significantly overvalued. The company's financial condition is strong, but its profitability is poor. Its growth ranks worse than 0% of 772 companies in the Semiconductors industry. To learn more about Aehr Test Systems stock, you can check out its 30-Year Financials here.
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