Generative AI And Silicon Photonics Will Expand Testing Capabilities

Key Takeaways

• FormFactor's advanced technologies and deep partnerships position it to capture outsized growth, expand market share, and achieve industry-leading margins as test intensity increases.
  
• Securing major roles in next-gen semiconductor and photonics ecosystems enables recurring, higher-margin revenue streams and early access to emerging growth opportunities.
  
• Customer concentration, industry consolidation, and rapid tech shifts are increasing FormFactor's revenue volatility, margin pressures, and exposure to cyclical and geopolitical risks.

Catalysts

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

• Analyst consensus expects double-digit sequential revenue growth in HBM probe cards driven by generative AI, yet this could be a significant understatement-FormFactor's deepening relationships with all three HBM manufacturers and the ramp-up of new fabs dedicated to additional capacity could drive outsized, sustained revenue acceleration and a structural uplift in long-term growth rates as HBM becomes the dominant DRAM architecture in AI and HPC.
  
• While analysts broadly expect efficiency gains and enhanced product offerings from the FICT partnership, the scale and speed at which FormFactor is leveraging advanced multilayer organic substrates and proprietary MEMS probe technologies could establish an enduring technological barrier, supporting best-in-class gross margins and expanding market share well beyond current industry projections.
  
• The rapid proliferation of co-packaged optics and silicon photonics offers multi-pronged growth opportunities-FormFactor's leadership in both lab and pilot production testing for these technologies positions it as the preferred supplier as the industry transitions to mass adoption, creating new, high-margin systems and probe card revenue streams earlier and at greater scale than currently modeled.
  
• The complexity of next-generation chip designs-particularly 2.5D/3D packaging, chiplets, and heterogeneous integration for applications in AI, automotive, and edge deployment-is driving a step-function increase in test intensity and probe card density, leaving FormFactor exceptionally well placed to capture a disproportionate share of a rapidly expanding total addressable market, with positive implications for structural top-line and EBITDA growth.
  
• FormFactor's direct-to-device and ecosystem partnerships with major semi manufacturers and ATE providers, including close R&D alignment and the move toward open, interoperable solutions, are likely to transform the company's revenue model into higher-margin, recurring business with greater earnings stability, while simultaneously catalyzing new cross-selling opportunities in emerging segments like cryogenic and engineering systems.

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 9.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 7.1% today to 11.8% in 3 years time.
• The bullish analysts expect earnings to reach $119.4 million (and earnings per share of $0.97) by about July 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 price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 37.6x on those 2028 earnings, down from 51.1x today. This future PE is greater than the current PE for the US Semiconductor industry at 31.6x.
• Analysts expect the number of shares outstanding to decline by 0.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.49%, as per the Simply Wall St company report.

FormFactor Future Earnings Per Share Growth

Risks

• Heightened geopolitical tensions and evolving tariff regimes, especially between the US and China, are causing revenue reductions and gross margin headwinds, as customers reevaluate supply chains and as FormFactor faces direct cost impacts on both inputs and outputs, which can directly suppress future revenue growth and reduce profitability.
  
• The company's reliance on a concentrated set of large customers exposes it to significant risk of revenue volatility and potential sudden drops in earnings, as even a single customer's business decisions or insourcing efforts could lead to sizable negative swings in reported revenue and net income.
  
• Industry consolidation among semiconductor manufacturers is driving greater purchasing leverage for a shrinking customer base, likely resulting in downward pricing pressures and compressed net margins for suppliers like FormFactor, especially if FormFactor cannot maintain technological differentiation.
  
• Rapid technology shifts-such as the industry's move toward more integrated, multi-functional chips and increased automation at the wafer and chiplet testing levels-could leave FormFactor exposed if its R&D investments fail to yield competitive products, risking both eroding market share and deteriorating gross margins.
  
• The cyclical and capital-intensive nature of the semiconductor industry, combined with potential overcapacity and demand fluctuations, renders FormFactor's revenue and earnings highly sensitive to sector downturns, as illustrated by recent sequential drops in both revenue and free cash flow when end-market demand weakens.

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 $30.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $119.4 million, and it would be trading on a PE ratio of 37.6x, assuming you use a discount rate of 9.5%.
• Given the current share price of $35.97, the bullish analyst price target of $45.0 is 20.1% 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.