Passing on Aehr Test and Symbotic

Now that earnings season is over, it is time to get back to the business of reviewing some more of the current Green Screen stocks!

Of course, finding companies that meet all of our key criteria to pass as a "green dot" stock is the primary objective, but it is also instructive to find stocks in these screens that do not meet our criteria.

This is useful in a few ways. First, quite simply, it allows us to "whittle down" the screened stocks and make it easier for both you and me to concentrate on other companies for research.

But it also helps to illustrate the business characteristics that we are both like and DON'T like to see in investment candidates.

With that, let's take a look at two intriguing "Hare" side Green Screen stocks that don't quite make the cut to be entered into the Watch List for future Buy consideration. Neither of these are bad companies, and many would argue they have massive growth potential (I wouldn't dispute that), but there are just too many unknowns, uncertainties, and business risks for me to be comfortable coming up with a fair value price at present.

Aehr Test Systems (AEHR)

Aehr (Advanced Hardware Engineering Recognition) Test Systems sells testing equipment to the makers of silicon carbide (SiC) based semiconductor chips. We could get really technical here, but suffice to say that SiC chips are perfectly suited to power-based applications thanks to their ability to handle much higher voltages than traditional silicon chips. That makes them ideal for end use cases such as electric vehicles (EVs) and related charging devices, as well as renewable energy installations.

Testing is especially important in this space. EV makers require absolute reliability. Safety is critical - components must have 0 defects - not 1 in 10,000, or even 1 in 100,000. That makes Aehr's test systems especially relevant. Industry data suggests CAGRs of over 50% for the rest of the decade, about what Aehr is forecasting for 2024. Growth potential is not a problem here.

So what are my concerns? There are a few. First, Aehr's sales consist of large equipment orders for its FOX testing and burn-in systems. While there is a measure of "razor and blade" in the firm's WaferPak contactors, which need to be replaced every 2-7 years, that's a bit long of a lifespan for me to consider it recurring revenue. Large equipment sales, particularly with a small firm in an industry as notoriously cyclical as semiconductors, can lead to wild swings in revenue and cash flows. It doesn't meet the "recurring revenue" requirement we're looking for.

Secondly, the risks are just too high for me to even contemplate a fair value estimate. The biggest one is customer concentration: Aehr gets over 75% of revenue from one customer, ONSemi. Sales to just 5 customers account for virtually all of the firm's revenue. That creates debilitating event risk.

Finally, I just don't see any particular moat. Sure, Aehr is a first-mover in SiC, but the big names in semi testing - notably Teradyne and Tokyo Electron - are likely eyeing the space for their own business. It's pretty small right now. Aehr only produced $65 million in fiscal 2023 revenue. But as it grows, the big players are likely to take an interest in grabbing market share. I don't see anything Aehr is doing that would prevent them from doing so.

This one is a pass - for now. We may revisit the stock a year or more down the road as the market develops.

Symbotic (SYM)

Symbotic is a cool company. The company produces full warehouse automation systems, from autonomous robots down to the software that controls them. Its systems are designed for "upstream" warehousing. Large retailers like Walmart, Albertsons, or Target receive massive shipment containers from suppliers. From there, products need to be broken down into store-level units ("atomized"), then efficiently stored, retrieved, and combined for fulfillment processes. The system can achieve full warehouse automation, replacing the legacy manual, expensive, and error-prone systems that exist today.

For those interested, read through the company's 10-K filing. It has a lot of detail on the system. It's pretty fascinating. Symbotic's system even uses techniques from computing, such as short-term caching of items and storage fragmentation. It can even operate in complete darkness! Very cool.

There are a lot of parallels between Symbotic and Aehr from a business potential perspective. Obviously, improving supply chain and fulfillment efficiency and cost has become a critical component of retailing, particularly after COVID and a must to compete with the Amazon's of the world. Management believes there is a $125 billion opportunity in its immediate domestic verticals, and over $350 billion when considering international and associated verticals. That's a HUGE market for a firm doing just over a billion in annual sales at present.

Symbotic is also founder-led. Richard Cohen started the company in 2006, inspired by the challenges he saw at his other firm, C&S Grocers. He controls over 50% of the super voting shares, giving him final say in the firm's direction.

Like Aehr, though, Symbotic just looks too "early stage" to be investable. It has a lot of the same issues. Sales are large, one-time deals for massive system deployments. When times are good, this means huge revenue windfalls. But when times are not good, customers are likely to delay or defer new investments, which leads to wild revenue swings. It is very difficult to predict a business like this. Less than 1% of sales are from recurring software maintenance contracts.

Customer concentration is an even bigger issue with Symbotic. A cool 94% of 2023 revenue came from one customer: Walmart. The majority of its $11 billion in backlog is also tied to Walmart. Walmart owns close to 5% of the company and has change control protections. I don't think it is unfair to say that, at present, Symbotic is operating at the whims of Walmart. So, while clearly there is a nice potential market here, Symbotic has not shown much ability to sell its systems outside of one (admittedly huge) customer. This creates all kinds of event risks, pricing risks, competitive risks, conflicts of interest, etc.

I love what this company does and can clearly see its market potential. However, it just doesn't seem quite at the point where it looks like an investable company. The reliance on Walmart is a present-day boon, but also clouds the long-term future potential here. I'd really like to see some other significant customers. The lack of recurring revenue is also a big strike. Symbotic is a pass.