FormFactor's Struggles Highlight the AI Hype vs. Reality: Navigating Semiconductor Demand Divergence

The semiconductor industry's AI-driven boom has created stark divides between companies thriving in next-gen markets and those still anchored to legacy tech. Nowhere is this divergence clearer than in the case of FormFactor (NASDAQ: FFT), whose recent financial struggles underscore the perils of conflating broad AI optimism with concrete demand. While giants like NVIDIA (NASDAQ: NVDA) enjoy soaring revenues from AI chips, FormFactor's weak earnings and tariff-related headwinds reveal the fragile reality beneath the hype. For investors, the lesson is clear: not all “AI plays” are equal.

FormFactor's Mixed Signals: AI Growth vs. Legacy Drag

FormFactor's Q1 2025 results offer a microcosm of the semiconductor industry's dual-track reality. Despite an 8.6% sequential revenue decline to $171.4 million, the company reported a beat in its core probe card business—critical for testing advanced chips like High-Bandwidth Memory (HBM) and co-packaged optics (CPO). These segments, fueled by AI applications, now account for nearly half of FormFactor's DRAM revenue. Yet the $0.10 EPS miss highlighted persistent weakness in non-HBM DRAM and Foundry & Logic probe-card demand, areas tied to softer consumer markets like PCs and mobile.

The company's Q2 outlook, projecting $190 million in revenue and $0.30 EPS, hinges on hyperscaler investments in generative AI, which require HBM-heavy chips. However, risks loom large: tariffs on shipments to China could slice Q2 revenue by millions and reduce margins by a full percentage point.

Contrasting with NVIDIA: The Chasm Between Direct and Indirect AI Plays

While FormFactor's results reflect a hybrid reality, NVIDIA's Q1 2025 earnings—boasting a 101% year-over-year revenue surge to $7.19 billion—exemplify the power of direct AI revenue streams. NVIDIA's GPUs, central to AI training and inference, are the lifeblood of data centers and cloud platforms. In contrast, FormFactor's AI exposure is indirect: its probe cards enable testing of chips used in AI systems, not the chips themselves. This distinction is critical.

Investors often overlook the difference between companies enabling AI infrastructure (like FormFactor) and those owning its core technologies (like NVIDIA). The latter have pricing power, recurring revenue, and direct ties to end-user demand. The former rely on the success of third-party chipmakers—a far riskier proposition.

(Data: 2023-2025. FFT has underperformed NVDA despite AI tailwinds, reflecting market skepticism about its indirect exposure.)

The AI Peripheral Overvaluation Trap

The semiconductor sector is littered with companies tagged as “AI beneficiaries” due to tangential exposures. FormFactor's post-earnings stock surge (+7%) suggests investors are still buying into the hype, even as its Q1 results revealed structural challenges. Meanwhile, companies lacking direct AI revenue—such as legacy probe card rivals or manufacturers of consumer-oriented semiconductors—are vulnerable to valuation resets.

The broader risk is clear: AI's exponential growth is real, but not all companies in the ecosystem will profit proportionally. Peripheral players like FormFactor face headwinds from cyclicality in traditional markets and geopolitical volatility. Investors chasing “AI plays” without scrutinizing revenue composition may find themselves overpaying for exposure to niche segments.

Investment Strategy: Prioritize Direct AI Revenue Ties

To navigate this divergence, investors should focus on firms with two key traits:
1. Direct AI Revenue Streams: Companies like NVIDIA, AMD (NASDAQ: AMD), and Intel (NASDAQ: INTEL) derive clear, measurable revenue from AI chips or data center infrastructure.
2. Scalability in Emerging Tech: Firms advancing critical AI enablers—such as CPO (which FormFactor tests for) or quantum computing—are safer bets than those relying on mature markets.

Avoid overvalued stocks in “AI peripherals” unless they dominate their niche (e.g., Applied Materials (NASDAQ: AMAT) in semiconductor equipment). For FormFactor itself, the path to sustained growth hinges on accelerating its shift to HBM and advanced packaging while mitigating tariff risks—a high-wire act with uncertain payoffs.

Conclusion

FormFactor's story is a cautionary tale for investors caught in AI's gravitational pull. While its HBM-focused strategy aligns with long-term trends, its Q1 results and tariff-related risks underscore the fragility of indirect exposures. As the semiconductor sector bifurcates between AI leaders and legacy laggards, the key question remains: Is a company riding the AI wave, or merely surfing the foam? The answer determines whether its stock is a buy—or a bubble waiting to burst.

(Data: 2023-2025. EPS volatility highlights reliance on cyclical markets and AI adoption variability.)