FormFactor’s AI-Driven Surge: Can Near-Term Tariffs Hinder Long-Term Dominance?

The semiconductor test equipment sector is rarely the stuff of investor daydreams, but FormFactor’s (NASDAQ: FFRT) Q2 2025 guidance offers a compelling exception. With revenue expected to jump 11% sequentially to $190 million—driven by soaring demand for AI-driven high-bandwidth memory (HBM) probe cards—the company is at the heart of a structural shift in semiconductor design. Yet clouds loom: U.S.-China trade tensions are shaving margins and sales, raising the question: Is this a buying opportunity for investors willing to look past near-term headwinds?

The answer hinges on two critical factors: the scale of HBM’s growth and FormFactor’s ability to navigate geopolitical risks. Let’s break down why the stock’s YTD -36% underperformance may now present a rare entry point.

The AI/HBM Catalyst: A Growth Engine Igniting

FormFactor’s Q2 revenue guidance is unambiguous: HBM is the driver. The company’s probe cards—critical for testing advanced DRAM stacks—now face unprecedented demand as AI chips increasingly rely on HBM to handle data-hungry workloads. Key trends fueling this boom:

1. HBM3e/HBM4 Adoption:
2. Existing HBM3e designs are ramping into volume production, while HBM4—a next-gen standard with double the bandwidth—has already begun shipping. Third-party estimates suggest HBM probe card spending could hit 1% of HBM revenue, nearly twice the industry average for probe card intensity.

3. A second major HBM customer (likely Samsung or SK Hynix) is contributing to diversification, reducing reliance on a single client.

4. Test Complexity and Margin Upside:

5. HBM’s stacked architecture (8–16 DRAM dies per chip) requires high-precision MEMS probes, a technical sweet spot for FormFactor. While HBM probe cards command higher margins than commodity DRAM, CEO Michael Slessor noted incremental gains as HBM4 ramps.

6. Advanced Packaging Synergies:

7. The $100M acquisition of FICT Limited—a supplier of multilayer organic substrates—is now paying dividends. FICT’s technology enables FormFactor to produce denser, smaller probe cards for HBM and foundry logic chips, directly addressing the needs of advanced packaging and co-packaged optics (CPO).

Tariff Headwinds: Manageable, Not Catastrophic

The elephant in the room is tariffs. U.S.-China trade tensions have hit FormFactor’s margins and sales:
- Revenue Impact: CFO Shai Shahar confirmed a mid-single-digit million-dollar revenue loss in Q2 due to tariffs on U.S.-made exports to China.
- Margin Drag: Gross margins are expected to dip by ~1% sequentially, as tariffs and component costs weigh.

But here’s why investors shouldn’t panic:
1. Short-Term Pain, Long-Term Gain:
- Tariffs are a known cost, and FormFactor’s manufacturing base in the U.S. (which produces ~80% of its products) means the worst-case scenarios—like forced relocations—are unlikely. Management’s “wait-and-see” approach avoids unnecessary capital expenditure.
- Geographic Diversification: While China sales are down, Taiwan, Korea, and the U.S. are stepping up HBM investments. HBM’s global adoption, not just in China, mitigates reliance on any single region.

1. Demand Pull-In? No:
2. Probe cards have short lead times (weeks, not months), so customers aren’t stockpiling ahead of tariffs. The Q2 growth is organic, reflecting true demand.

The Stock’s Case: A Structural Play at a Discount

At its current valuation, FormFactor is priced for a world where AI adoption stalls and tariffs intensify—a scenario that seems increasingly unlikely. Consider:
- YTD Underperformance: FFRT has dropped 36% year-to-date, far outpacing broader semiconductor declines. This pessimism likely overstates tariff risks.
- Long-Term Targets: Management’s $850M revenue and $2 EPS targets are achievable if HBM adoption meets expectations. The FICT acquisition and CPO test systems (which will see multiple Q2 shipments) provide mid-term catalysts.

Risks and the Bottom Line

No investment is risk-free. FormFactor’s biggest threats include:
- PC Demand Volatility: A smaller segment, but a drag if Windows 10’s end-of-life spurs no upgrade cycle.
- Trade Policy Uncertainty: A new U.S. administration could escalate tensions, though FormFactor’s exposure is mitigated by its global customer base.

But for investors with a 3–5 year horizon, these risks pale against the AI/HBM tailwinds. The stock’s ~$15 price (as of May 2025) represents a 20% discount to its 52-week high, despite no material weakening in fundamentals.

Investment Thesis: Buy FFRT at current levels. The HBM-driven growth is structural, the tariff drag is temporary, and the FICT acquisition cements FormFactor’s position in advanced packaging. This is a classic case of a misunderstood stock poised to outperform as AI infrastructure spending accelerates.

The next 12 months will test FormFactor’s ability to execute, but the setup is clear: a company with a $2B market cap and a $850M revenue target is playing on a global stage where HBM is the new gold rush. For investors willing to look beyond tariffs, now is the time to strike.