FormFactor Looking At Increasingly Challenging End Markets

Shares of FormFactor (FORM) have fallen about 6% since my last update, which I actually consider a pretty restrained response to what has been a stream of bad (or at least weak) news about the chip market, including weakening NAND prices, delays in architecture transitions, and what seems to be a general slowing trend across the sector. Investors even shrugged off a fairly weak guide from FormFactor with second quarter earnings that led to a greater than 10% drop in the average EPS estimate for 2018 and a roughly 10% drop for the 2019 estimate as well.

I like FormFactor as a business, and I like the company’s leverage to increasingly sophisticated chip architectures that make the company’s MEMS-based probe card technology even more compelling and competitive. I don’t like the idea of potentially reaching into to a woodchipper to grab a bargain, though, as there is probably still more downside risk in chip volume expectations than upside risk. For those not afraid of earning the nickname “Stumpy”, there appears to be value in FormFactor today and even I admit wondering whether expectations are low enough to buy in now.

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FormFactor Looking At Increasingly Challenging End Markets

FormFactor Starting To See A Ramp

For probe card companies like FormFactor (NASDAQ:FORM), business is often difficult to forecast from quarter to quarter, as customers in the memory and logic space will often quickly change their orders in response to market conditions. While the addition of Cascade should take away some of the volatility by adding in a steadier R&D-driven engineering business, the reality is that the demand for chips for PCs, servers, and phones (not to mention memory) will remain predictably unpredictable.

At this point, though, business seems to be pointing up for FormFactor. Intel (NASDAQ:INTC) has significantly increased its orders and while the year-over-year comparisons in memory are weak, they are improving on a sequential basis. Looking ahead to the next generation of smartphones and servers, not to mention growing demand for sensors and connectivity chips for use in auto and IoT applications, FormFactor should be looking at some good revenue growth and margin leverage prospects in the coming years.

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FormFactor Starting To See A Ramp

Seeking Alpha: FormFactor Hoping That SoCs Drive A New Leg Of Growth

Wafer probe card company FormFactor (FORM) has had a terrible time of it on a long-term basis. After trading in the $40's back in 2007/08, the shares have chopped steadily down into the single-digits as the company has gone from being a cash-generating double-digit margin company to one that has posted years of losses. This decline has been spurred in part by major fundamental shifts in the company's previously core memory markets and company-specific execution issues.

The view in the rearview mirror is decidedly ugly, but the real question is whether FormFactor has positioned itself for a better future. The 2012 acquisition of MicroProbe has positioned the company as a meaningful player in the faster-growing system-on-a-chip (SoC) market, but manufacturing issues in the third quarter draw attention back to years of execution and performance issues. This is definitely a high-risk situation, and I'm not sure FormFactor can or will build on what MicroProbe brought them, but expectations are at a point where I think aggressive investors may want to take a closer look.

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FormFactor Hoping That SoCs Drive A New Leg Of Growth

Seeking Alpha: New Products And Technologies Can Continue To Push Cascade Microtech

Within the world of semiconductor equipment, Cascade Microtech (CSCD) is a tiny player, though it has respectable market share in what management has traditionally viewed as its core markets. New product launches and improving margins have done wonders for the stock (which is up almost 90% over the past 12 months), but I think there could still be more to come.

Cascade has not only been developing new products to broaden its addressable market, but has also been acquiring technologies and products that should help the company transition to the next major developments in chip design. Cascade does not have a great record when it comes to sustainable margins or cash flows, and it does operate in a notoriously cyclical industry. Even so, I don't believe it takes particularly heroic assumptions to suggest that the shares could still have upside.

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New Products And Technologies Can Continue To Push Cascade Microtech