FormFactor: The Provider of Test and Measurement Solutions Should Benefit From Increasing Demand in the Growing HBM Market

FormFactor (NASDAQ: FORM) is a leading provider of critical test and measurement technologies for the entire lifecycle of semiconductor products, from characterization, modeling, reliability and design troubleshooting to qualification and production testing. The company offers semiconductor companies a wide range of high performance test cards, analytical probes, test stations, thermal systems and cryogenic systems. The products provide electrical information from a variety of semiconductor and electro-optical devices and integrated circuits from early research through development to mass production. Customers use the products and services to increase their profitability by optimizing device performance and improving chip yield knowledge. FormFactor serves its customers through a network of offices in Asia, Europe and North America.

FormFactor is positioned in the growing HBM memory market
FORM is a supplier of test probes, including for high bandwidth memory (HBM), to the three leading DRAM manufacturers. These include SK Hynix, the market leader in HBM memory. HBM memory is often used in close conjunction with GPUs supplied by companies such as NVIDIA, as HBM offers much greater bandwidth than traditional DRAM, resulting in faster and more efficient processing of data in AI applications while reducing latency, power consumption and overall module size.

HBM memory is currently in high demand. In fact, the HBM market is growing by leaps and bounds, much faster than the DRAM market or the semiconductor market as a whole. The HBM market will grow from a volume of $5.5 billion in 2023 to around $14.1 billion in 2024. The market has already roughly doubled from 2022 to 2023. By comparison, the DRAM market is forecast to grow by 42% year-on-year in 2024, after shrinking by 36% in 2023. Looking ahead, the HBM market is expected to continue growing solidly and reach a value of around $38 billion in 2029, which corresponds to an average annual growth rate of 22% in the period from 2024 to 2029.

The sale of the China business brought in around $20 million
In Q1 2024, the company generated a net profit of $21.8 million, compared to $1.3 million in Q1 2023. The reason for the huge jump in profits was the successful sale of the China business, which secured an exclusive distribution and partnership agreement to continue selling and supporting the products in the region (the "China Transaction"). As a result of the China Transaction, FormFactor received an estimated net consideration of $21.1 million, which resulted in a gain of $20 million. Aside from this gain, the weakness in the semiconductor industry that began in Q3 FY2022 continued into FY2024 and impacted most markets in the Company's Probe Cards segment. In addition, due to the sale of the FRT metrology business in Q4 2023, the Systems segment's revenue was impacted by lower sales of measurement systems.

Nevertheless, the management is confident about the further course of business. According to statements, there is a significant sequential increase in demand, with an expected corresponding increase in gross margin and non-GAAP earnings per share, which is expected to continue in Q2. This is mainly due to the strength in both DRAM and Foundry & Logic test cards, which is increasing due to the introduction of advanced packaging in the semiconductor industry.

Conclusion: The HBM business is responsible for almost half of DRAM revenue and has doubled year-on-year. The results for Q1 2024 were in line with expectations. More important, however, is the forecast for Q2 2024. Earnings per share are expected to be between $0.27 and $0.35, significantly exceeding analysts' estimates of $0.22. However, the P/E ratio of 46 is high. An increase in EPS this year and next year is likely to depress the high valuation somewhat.

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