FormFactor Business Reflects Signs Of Bottoming, Is Well Positioned For Recovery, Analysts Say Post Q4

Needham analyst Charles Shi maintained FormFactor Inc FORM with a Buy and raised the price target from $28 to $36.

FormFactor surprised the Street to the upside as it reported 4Q22 revenue exceeding the high end of its guidance and guided 1Q23 to be roughly flat sequentially. 

In 4Q22, all four end markets weakened sequentially. In 1Q23, however, the company's guidance suggests that microprocessors and mobile SoCs will likely see sequential improvements, while memory could further decline, and RF will probably be bumping along the bottom. 

Although the memory decline will likely more than offset the improvement in microprocessors and mobile SoCs, the rate of decline is slowing. After two consecutive quarters of cutting outlook by double digits, the analyst believes this FORM print will likely be read as the first sign of bottoming for the business. 

While the analyst believes there will likely be another leg down to FORM's memory business, recovery of mobile demand seems to be on the horizon. 

It is unclear whether the demand from Intel Corp INTC is bottoming. Intel contributes ~20% of FORM's total revenue and tends to move the needle for FORM stock. Intel is experiencing unusual weakness. FORM's business from Intel is showing signs of stabilization. 

FORM expects revenue for SoC probe cards for mobile application processors to grow into 1Q23, but at the same time, sees RF probe card demand to remain muted, echoing comments from Qualcomm Inc QCOM and others. 

According to management, the pickup of RF probe card demand may slightly trail the pickup of SoC probe card demand but should lead end market recovery, likely in 2H23.

DA Davidson analyst Hans Chung maintained a Buy and raised the price target from $32 to $36.

The 4Q revenue upside mainly came from the recovery of China-related revenue and moderately more robust demand in mobile and PC driven by new product ramps. The 1Q GMs outlook came ahead of expectations due to a favorable mix, reduced obsolete inventory cost, and restructuring benefits. 

Despite the current downturn, demand is stabilizing. The analyst remained bullish on medium to long-term prospects as the company is well-positioned to benefit from rising complexity and wafer test intensity.

Price Action: FORM shares traded higher by 13.6% at $32.87 on the last check Thursday.