AI And Digital Transformation Will Fuel Advanced Chip Testing Expansion

Key Takeaways

• Accelerating share gains in the HBM and AI-driven probe card markets, along with capacity investments, position FormFactor for significant revenue and earnings inflection.
  
• Expansion into data center, custom ASIC, and quantum computing markets diversifies revenue streams and reduces reliance on legacy, cyclical segments.
  
• Margin and revenue growth are challenged by adverse product mix, tariff pressures, industry consolidation, customer concentration, and risks to technology leadership and market share.

Catalysts

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

• While analyst consensus expects strong HBM probe card growth mainly from hyperscaler AI investments, this likely understates the true magnitude-FormFactor is now qualified and shipping in volume to all three major HBM customers, and management sees their share with lagging customers as significantly below a 50-50 entitlement, indicating room for exceptional incremental share gains and accelerating HBM revenue far above current expectations.
  
• Analyst consensus connects the Texas facility and FICT investments to incremental margin improvement and capability, but the broader point is these moves signal a doubling-down on long-term, low-cost, high-growth capacity-management expects the HBM probe card market alone could support doubling the size of the company, making an explosive revenue and earnings inflection plausible should AI-driven test intensity and share gains converge rapidly.
  
• The adoption of co-packaged optics and silicon photonics in hyperscale data centers is approaching a breakthrough, with FormFactor systems in pilot production ahead of the anticipated high-volume ramp in 2026-positioning the company for a structural step-change in both Systems segment revenue and overall company gross margins as the data center buildout is constrained by energy limits rather than hardware demand.
  
• Management is successfully diversifying beyond legacy cyclical markets (mobile and PC) into higher-value, less-volatile segments such as custom ASICs and GPU probe cards for hyperscalers, unlocking significant new profit pools and insulating FormFactor from traditional downturns-impacting both revenue stability and blended net margin upside in the long term.
  
• The quantum computing segment, though discounted by the market due to its perceived nascency, is already delivering shipment growth, with FormFactor's cryogenic probe systems central to early commercial efforts-offering a credible pipeline to material new addressable market expansion and another potential "call option" on revenue and earnings acceleration as quantum adoption gathers pace.

FormFactor Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on FormFactor compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming FormFactor's revenue will grow by 11.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 5.7% today to 13.7% in 3 years time.
• The bullish analysts expect earnings to reach $146.0 million (and earnings per share of $0.88) 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 price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 31.3x on those 2028 earnings, down from 53.1x today. This future PE is greater than the current PE for the US Semiconductor industry at 30.4x.
• Analysts expect the number of shares outstanding to decline by 0.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.15%, as per the Simply Wall St company report.

FormFactor Future Earnings Per Share Growth

Risks

• FormFactor continues to experience gross margin and profitability challenges despite revenue strength, attributed to unfavorable product mix shifts toward lower-margin DRAM markets, increasing operational costs, and persistent headwinds from tariffs, all of which could compress margins and lower net earnings in the long term.
  
• The company is exposed to heightened volatility and unpredictability in revenue due to heavy reliance on a small number of large customers and the cyclical nature of the semiconductor industry, increasing the risk of sharp earnings swings if key customer programs slow or restructure.
  
• Global trade tensions and tariffs are already materially impacting FormFactor's gross margins, while further tariff escalations or shifts in export controls could exacerbate supply chain costs and disrupt operations, negatively impacting both revenues and margins over time.
  
• The semiconductor industry is experiencing increased customer consolidation and greater vertical integration by leading chipmakers, which could erode FormFactor's negotiating power, lead to more competitive pricing pressure, and reduce its addressable market, thereby impacting revenue growth and margins.
  
• FormFactor's ability to maintain technology leadership is threatened by possible delays or failures in developing next-generation test and measurement solutions; compounded by rising R&D costs, labor cost pressures, and advancing customer in-house testing capacity, the company could lose market share and suffer declining revenues and deteriorating profitability.

Valuation

• The assumed bullish price target for FormFactor is $45.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of FormFactor's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• 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 bullish analysts, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $146.0 million, and it would be trading on a PE ratio of 31.3x, assuming you use a discount rate of 10.2%.
• Given the current share price of $30.25, the bullish analyst price target of $45.0 is 32.8% 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.