Generative AI And Texas Capacity Will Transform Semiconductor Testing

Key Takeaways

• Expanding presence in AI and advanced chip markets, coupled with strategic manufacturing investments, enhances FormFactor's growth opportunities and long-term profitability.
  
• Diversification across customers and partnerships reduces earnings volatility and increases stability as demand shifts toward AI, custom ASICs, and connectivity solutions.
  
• Margin, revenue, and earnings stability are challenged by unfavorable product mix, concentrated customers, rising costs, trade risk, and intensifying competition in advanced semiconductor technologies.

Catalysts

Designs, manufactures, and sells probe cards, analytical probes, probe stations, thermal systems, cryogenic systems, and related services in the United States and internationally.

• Accelerating adoption of generative AI, high-performance computing, and HBM DRAM in data centers is driving substantial increases in test complexity and intensity-FormFactor's differentiated probe cards and early leadership in HBM4 chiplet testing position the company to benefit from higher ASPs and revenue growth as these markets scale. (Impacts: Revenue, potential margin improvement)
  
• Broader diversification and increased penetration with all three major HBM DRAM manufacturers, plus growing engagement with hyperscaler and custom ASIC customers, reduces historical customer concentration risk and smooths volatility, supporting more stable earnings and extending future market opportunity as AI-related semiconductor spending rises. (Impacts: Revenue stability, earnings visibility)
  
• Strategic investments in new manufacturing capacity (Farmers Branch, Texas) and vertical integration via organic substrate partnerships aim to expand production, lower long-term operating costs, and leverage financial/regulatory incentives-enabling margin expansion and improved profitability as AI and advanced packaging demand intensifies. (Impacts: Gross margins, net margins)
  
• Shift in test demand from mobile/PC to AI, custom ASICs, GPU, and co-packaged optics markets, along with closer collaboration with foundries and OSATs, increases exposure to secular growth areas in connectivity and data infrastructure-positioning FormFactor to capture a greater share of high-growth, high-complexity semiconductor testing revenue streams. (Impacts: Long-term revenue growth)
  
• The anticipated 2026 ramp in silicon photonics and co-packaged optics pilot programs is expected to drive higher demand for advanced probing/test equipment, targeting the data center energy efficiency bottleneck and providing additional runway for revenue growth and product differentiation amidst broader expansion of IoT and connected device semiconductors. (Impacts: Revenue, product mix, margin potential)

FormFactor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FormFactor's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 9.9% in 3 years time.
• Analysts expect earnings to reach $97.0 million (and earnings per share of $0.78) by about August 2028, up from $43.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.3x on those 2028 earnings, down from 53.6x today. This future PE is greater than the current PE for the US Semiconductor industry at 30.0x.
• Analysts expect the number of shares outstanding to decline by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.16%, as per the Simply Wall St company report.

FormFactor Future Earnings Per Share Growth

Risks

• Persistent gross margin pressure from an unfavorable product mix (shift towards historically lower-margin DRAM and fluctuating Systems segment contributions), operational cost increases, and rising tariffs have eroded profitability, making it difficult for FormFactor to demonstrate a clear path to their long-term target model of 47% gross margin, which may constrain future net margins and earnings.
  
• FormFactor faces ongoing volatility in DRAM and HBM demand, as revenue remains highly concentrated with a few large customers and these customers' output is tied to a small number of designs with short lead times; this customer concentration risk and product cycle volatility could create material swings in quarterly revenue, impacting earnings stability.
  
• Higher operating expenses are expected due to increased headcount, salary adjustments, and ramp-up costs for the new Farmers Branch facility, while benefits from this new Texas manufacturing site (cost reductions and efficiency improvements) may take time to materialize, leading to possible margin and cash flow compression in the interim.
  
• The company is exposed to rising geopolitical and regulatory risks, particularly from U.S.-China trade tensions and tariffs, which are estimated to reduce gross margin by up to 1.5–2 percentage points; continued or worsening trade barriers could further escalate costs, disrupt supply chains, and decrease future profitability.
  
• Technological disruption and competition remain significant long-term risks: slow adoption or missed execution in high-growth areas such as advanced packaging, chiplet integration, co-packaged optics, and quantum computing could allow competitors to seize market share and result in revenue shortfalls; additionally, if semiconductor manufacturers insource probe card production or vertically integrate, FormFactor could see reduced demand and further gross margin and revenue pressure.

Valuation

• The analysts have a consensus price target of $33.75 for FormFactor based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $23.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $984.3 million, earnings will come to $97.0 million, and it would be trading on a PE ratio of 35.3x, assuming you use a discount rate of 10.2%.
• Given the current share price of $30.56, the analyst price target of $33.75 is 9.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.