HBM4 Ramp-Up Will Drive DRAM Probe Card Demand In 2025

Key Takeaways

• Strategic initiatives and partnerships enhance technology access and innovation, potentially boosting revenue through efficiencies and high-performance markets.
  
• Growth in high-performance computing and advanced markets expected to drive demand, improving revenue, gross margins, and profitability.
  
• Dependency on cyclical markets and export controls, particularly affecting non-HBM DRAM probe cards, present revenue and margin challenges due to geopolitical and demand shifts.

Catalysts

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

• The acquisition of FICT Limited by FormFactor, in partnership with MBK Partners, is expected to enhance access to critical technologies and products, potentially leading to an increase in revenue through the advanced packaging market.
  
• The technology partnership with Advantest Corporation strengthens the portfolio and may lead to improvements in operational efficiencies and innovation, potentially enhancing revenue and gross margins as demand for high-performance computing increases.
  
• The expected ramp-up of HBM4 designs in 2025 is likely to drive significant growth in DRAM probe card demand, contributing to higher revenue as new chip designs necessitate new probe cards.
  
• Given the anticipated return to growth in foundry and logic markets in 2025, potential increases in demand could improve revenue and profitability, contributing positively to FormFactor’s bottom line.
  
• The strategic initiatives to develop cost-competitive architectures and extend high-performance platforms may help mitigate product mix challenges and improve gross margins, thus leading to better earnings in the future.

FormFactor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FormFactor's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.1% today to 13.9% in 3 years time.
• Analysts expect earnings to reach $115.2 million (and earnings per share of $0.82) by about April 2028, up from $69.6 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 37.0x on those 2028 earnings, up from 28.7x today. This future PE is greater than the current PE for the US Semiconductor industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.92%, as per the Simply Wall St company report.

FormFactor Future Earnings Per Share Growth

Risks

• The expected sequential reduction in demand for non-HBM DRAM probe cards, especially due to U.S. export controls impacting shipments to China, could negatively impact revenue growth.
  
• Foundry and logic segments continue to face significant weakness, with no foundry and logic customer accounting for 10% of revenue, indicating potential revenue uncertainties and challenges in reviving net margins.
  
• The lower levels of foundry and logic demand combined with a shift towards DRAM probe cards create a challenging product mix leading to gross margins below the target, potentially affecting overall earnings.
  
• The ongoing geopolitical tensions, particularly the tightening of U.S. export controls, create structural headwinds that reduce the ability to serve certain high-volume markets, potentially impacting future revenue streams.
  
• FormFactor's dependency on cyclical markets like client PCs and mobile handsets, which remain weak with limited visibility into recovery, may result in volatile revenue and earnings forecasts.

Valuation

• The analysts have a consensus price target of $42.222 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 $34.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $828.2 million, earnings will come to $115.2 million, and it would be trading on a PE ratio of 37.0x, assuming you use a discount rate of 8.9%.
• Given the current share price of $25.93, the analyst price target of $42.22 is 38.6% 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.