Cohu (COHU) and the Semiconductor Test Equipment Recovery Cycle: Evaluating Q2 2025 as a Strategic Entry Point for AI and Onshoring-Driven Growth

The semiconductor industry is entering a pivotal inflection point in 2025, driven by the confluence of artificial intelligence (AI) demand and global onshoring initiatives. As chipmakers scramble to meet the insatiable appetite for advanced AI hardware and secure supply chains against geopolitical risks, test equipment providers like Cohu (NASDAQ: COHU) are emerging as critical enablers of this transformation. The company's Q2 2025 results, while mixed in terms of GAAP profitability, reveal a compelling narrative of strategic alignment with these megatrends. For investors, this raises a key question: Is Cohu's current performance a compelling entry point to capitalize on the semiconductor test equipment recovery cycle?

Cohu's Q2 2025: A Snapshot of Progress and Challenges

Cohu reported net sales of $107.7 million in Q2 2025, a modest increase from $104.7 million in the same period in 2024. While GAAP net loss widened to $16.9 million (or $0.36 per share), non-GAAP net income of $0.7 million ($0.02 per share) underscores operational improvements. The company's gross margin of 43.7% (GAAP) and 44.4% (non-GAAP) reflects disciplined cost management, and test cell utilization rose to 75%, a 3-point sequential increase, signaling stronger demand in core test equipment segments.

Key developments in Q2 include a $28 million design-win order for mobile and automotive test applications, the introduction of the Eclipse handler model to expand market share in test subcontractors, and the qualification of the ULTRA-S contactor for precision analog IC testing. These moves highlight Cohu's focus on high-growth end markets and product differentiation. Additionally, the company's first system sold in India and expansion into AI-driven software analytics (via its Tignis acquisition) position it to benefit from onshoring and data-centric manufacturing trends.

Strategic Alignment with AI and Onshoring Trends

The semiconductor test equipment market is projected to grow significantly in 2025, driven by two megatrends:
1. AI Chip Demand: Generative AI and high-performance computing (HPC) are driving demand for advanced test solutions, particularly for chips like High Bandwidth Memory (HBM) and AI accelerators. Cohu's HBM inspection systems and AI process monitoring software (via Tignis) are directly aligned with this shift.
2. Onshoring Resilience: Governments and corporations are prioritizing localized production to mitigate supply chain risks. Cohu's expansion into India and its focus on secure, localized testing infrastructure cater to this demand.

The global semiconductor industry is expected to reach $697 billion in sales in 2025, with AI-related chips accounting for over $150 billion. Cohu's recurring revenue model (63% of Q2 sales) provides stability in a cyclical industry, while its gross margin expansion and product innovations suggest long-term upside.

Risk Mitigation and Financial Resilience

Cohu's cash reserves of $209.4 million as of Q2 2025 provide flexibility for R&D and strategic acquisitions. The company's non-GAAP results exclude non-operational expenses like share-based compensation and restructuring charges, offering a clearer view of core operational performance. While GAAP losses persist, the narrowing of these losses compared to Q1 2025 ($30.8 million) indicates progress.

However, Cohu faces headwinds, including macroeconomic volatility, inventory overhangs in traditional markets (PCs, smartphones), and geopolitical risks. The integration of Tignis and monetization of AI-driven software remain critical execution risks.

Investment Thesis: A Strategic Entry Point

For investors, Cohu's Q2 2025 results present a compelling case for a strategic entry. The company is:
- Positioned in high-growth segments (AI, HBM, SiC) with proprietary technology and margins above 50% in new product lines.
- Leveraging AI-driven software (via Tignis) to transition from equipment sales to high-margin recurring software revenue.
- Benefiting from onshoring trends through localized production and secure testing infrastructure.

The $28 million design-win order and $100 million multi-year contract with a European semiconductor manufacturer (announced in Q1 2025) validate Cohu's ability to secure large, recurring revenue streams. With third-quarter guidance of $125 million ±$7 million, the company is signaling confidence in its growth trajectory.

Conclusion: A Calculated Bet on the Semiconductor Recovery

Cohu's Q2 2025 performance reflects a company in transition—navigating short-term challenges while laying the groundwork for long-term growth. For investors with a 3–5 year horizon, the current valuation (trading at a discount to peers in the test equipment sector) and alignment with AI and onshoring megatrends make Cohu an attractive candidate. However, caution is warranted around execution risks, particularly in software integration and macroeconomic volatility.

Investment Advice: Consider a gradual entry into COHU, leveraging pullbacks in valuation to accumulate shares. Monitor Q3 2025 results for further confirmation of the company's ability to scale its AI-driven software and expand into high-growth markets.