FormFactor (FORM)

Semiconductor testing company FormFactor (NASDAQ:FORM) announced better-than-expected revenue in Q3 CY2025, but sales fell by 2.5% year on year to $202.7 million. On top of that, next quarter’s revenue guidance ($210 million at the midpoint) was surprisingly good and 5.2% above what analysts were expecting. Its non-GAAP profit of $0.33 per share was 32.7% above analysts’ consensus estimates.

Company Overview

With customers across the foundry and fabless markets, FormFactor (NASDAQ:FORM) is a US-based provider of test and measurement technologies for semiconductors.

Competitors in the market for probe cards, FormFactor’s largest product category, include Advanced Micro Silicon Technology, Chungwa Precision Test Technology, Feinmetall, and Japan Electronic Materials Corporation (TYO:6855).

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, FormFactor’s sales grew at a tepid 2.4% compounded annual growth rate over the last five years. This fell short of our benchmarks and is a poor baseline for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. FormFactor’s annualized revenue growth of 7.2% over the last two years is above its five-year trend, suggesting its demand recently accelerated.

This quarter, FormFactor’s revenue fell by 2.5% year on year to $202.7 million but beat Wall Street’s estimates by 1.3%. Despite the beat, the drop in sales could mean that the current downcycle is deepening. Company management is currently guiding for a 10.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 6.7% over the next 12 months, similar to its two-year rate. This projection doesn't excite us and implies its newer products and services will not catalyze better top-line performance yet.

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, FormFactor’s DIO came in at 81, which is 14 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.

In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

FormFactor’s gross margin is well below other semiconductor companies, indicating a lack of pricing power and a competitive market. As you can see below, it averaged a 39.6% gross margin over the last two years. That means FormFactor paid its suppliers a lot of money ($60.41 for every $100 in revenue) to run its business.

This quarter, FormFactor’s gross profit margin was 39.8%, in line with the same quarter last year. On a wider time horizon, FormFactor’s full-year margin has been trending down over the past 12 months, decreasing by 2.4 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

FormFactor was profitable over the last two years but held back by its large cost base. Its average operating margin of 12% was weak for a semiconductor business. This result isn’t too surprising given its low gross margin as a starting point.

Analyzing the trend in its profitability, FormFactor’s operating margin decreased by 6 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. FormFactor’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q3, FormFactor generated an operating margin profit margin of 8.9%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for FormFactor, its EPS declined by 5.5% annually over the last five years while its revenue grew by 2.4%. This tells us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

We can take a deeper look into FormFactor’s earnings to better understand the drivers of its performance. As we mentioned earlier, FormFactor’s operating margin was flat this quarter but declined by 6 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q3, FormFactor reported adjusted EPS of $0.33, down from $0.35 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects FormFactor’s full-year EPS of $1.10 to grow 14.3%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

FormFactor has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.7%, lousy for a semiconductor business.

Taking a step back, we can see that FormFactor’s margin dropped by 9.8 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business.

FormFactor’s free cash flow clocked in at $19.66 million in Q3, equivalent to a 9.7% margin. This result was good as its margin was 1.1 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

FormFactor historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 8.7%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

FormFactor is a profitable, well-capitalized company with $266 million of cash and $19.89 million of debt on its balance sheet. This $246.1 million net cash position is 5.4% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was good to see FormFactor beat analysts’ EPS expectations this quarter. We were also excited its adjusted operating income outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a solid print. The stock traded up 9.6% to $52.20 immediately after reporting.

Updated: December 4, 2025 at 9:34 PM EST

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own FormFactor, you should also grasp the company’s longer-term business quality and valuation.

FormFactor doesn’t pass our quality test. For starters, its revenue growth was uninspiring over the last five years. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its low free cash flow margins give it little breathing room. On top of that, its cash profitability fell over the last five years.

FormFactor’s P/E ratio based on the next 12 months is 39.8x. This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $56.88 on the company (compared to the current share price of $57.38).