HBM4 Demand And FICT Acquisition Will Drive Expansion

Key Takeaways

• Strategic divestment from China and focus on high-growth regions minimize geopolitical risks, stabilizing margins and optimizing revenues amid trade uncertainties.
  
• Collaborations in co-packaged optics and investments in generative AI drive revenue growth, enhancing market share in probe cards and Systems business.
  
• FormFactor's financial performance is threatened by geopolitical trade issues, supply chain costs, reliance on DRAM, capital strain from innovation, and macroeconomic volatility.

Catalysts

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

• FormFactor expects double-digit sequential revenue growth in the second quarter driven by increased demand for high-bandwidth memory DRAM probe cards, which is primarily fueled by hyperscalers' investments in generative AI, impacting revenue positively.
  
• The company's acquisition of FICT Limited solidifies access to complex multilayer organic substrates, enhancing their product offerings in foundry and logic probe cards, likely improving earnings through improved capital efficiency and reduced risk as compared to an outright acquisition or internal development.
  
• The transition to higher demand for HBM4 designs in the second half of 2025, alongside a growing customer base for HBM probe cards, is anticipated to enhance FormFactor’s market share and revenue, driven by the accelerating adoption of generative AI.
  
• FormFactor's collaboration with customers on co-packaged optics using silicon photonics is set to drive significant midterm growth in the Systems and probe card businesses, which is expected to impact revenue and profitability positively as demand increases in data center applications.
  
• The company's strategic divestment from China operations and focus on other high-growth regions has minimized the impact of geopolitical risks and tariffs, potentially stabilizing net margins and optimizing revenue streams amid trade uncertainties.

FormFactor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FormFactor's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.1% today to 8.8% in 3 years time.
• Analysts expect earnings to reach $83.4 million (and earnings per share of $0.91) by about May 2028, up from $54.2 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 47.3x on those 2028 earnings, up from 41.8x today. This future PE is greater than the current PE for the US Semiconductor industry at 22.5x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.14%, as per the Simply Wall St company report.

FormFactor Future Earnings Per Share Growth

Risks

• FormFactor faces potential revenue and margin reductions due to the impact of tariffs and evolving geopolitical situations, as uncertainties and trade restrictions with countries like China could disrupt sales and customer relationships, impacting overall financial performance.
  
• There are significant challenges associated with supply chain and manufacturing cost structures, as importing subcomponents from countries like Japan and Germany could lead to higher costs and reduced gross margins, affecting profitability.
  
• FormFactor's reliance on the DRAM market segment, particularly high-bandwidth memory (HBM), increases the company's risk exposure to fluctuations in DRAM demand and technological transitions. This dependency could negatively impact revenue stability if HBM adoption or customer adoption rates slow down.
  
• Although FormFactor is focusing on innovation through acquisitions and partnerships like the one with FICT, the investment and integration could be capital-intensive and result in financial strain or not yield the expected returns, impacting earnings and net margins.
  
• The volatile macroeconomic conditions and global semiconductor market's pace of change could outstrip FormFactor’s ability to adapt quickly, possibly leading to missed opportunities or competitive disadvantages that would hinder revenue growth and market position.

Valuation

• The analysts have a consensus price target of $39.444 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 $52.0, and the most bearish reporting a price target of just $32.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $948.2 million, earnings will come to $83.4 million, and it would be trading on a PE ratio of 47.3x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $29.38, the analyst price target of $39.44 is 25.5% 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.