FORM - FormFactor: The Story Continued

Summary

• Thanks to Technoprobe's presentation, we might conclude that FormFactor is losing market share.
• The Italian player is leading the 3D MEMS segment with more R&D and more employees. FormFactor decided to lower its workforce.
• Technoprobe raised its Q4 estimates while FormFactor is lowering its target.

Here at the Lab, this year we already compared the two leading companies in the probe industry FormFactor ( FORM ) and Technoprobe. As you already know, our preference was for the Italian player ( the Clear Winner ) and looking at the stock price performances, we hope that you get on board with us. In 2022, FormFactor's stock price was cut by two, whereas Technoprobe is up by almost 17% since its IPO. Today, we are going back to comment and compare the Q3 results, we already performed FormFactor’s Q3 analysis ; however, Technoprobe just recently announced its Q3 results and again demonstrated strong financials.

During the reporting day, FormFactor declined by almost 25% in a single market session. This was due to lower guidance for Q4. Equity research analysts are now pricing trade restrictions between China and the US, lower demand in logic/RF, and a slowdown in FormFactor activities based on a macro call. Other analysts were quoting a limited upside and challenging short/medium term environment with a few years delay in FormFactor’s target. We have another understanding. First of all, here at the Lab, we are pretty bullish on the semis industry and we do have an overweight on STM and Infineon , supported by macro and micro reasons. None of these analysts are mentioning competition. And we believe that Technoprobe is simply outperforming FormFactor both financially and operationally. The last presentation from the Italian player fully supports our thesis. The total probe market value is estimated at $2.5 billion with non-memory applications that are growing more than memory applications. In detail, Technoprobe is very focused on R&D, non-memory application's main market is Vertical MEMS Probes Cards which grew by almost 30% in a single year (compared to the traditional probe card market at +9.1%). In our initiation of coverage, we mentioned how the Italian player was delivering higher top-line sales and better marginality. Indeed, one of our key takeaways was 3D MEMS development thanks to Microfabrica’s acquisition, a leader in 3D metallic MEMS production . On a yearly basis, as reported in the figure below, Technoprobe increased its market share penetration from 44% to 51%. This is the reason why the Italian player is able to show a solid revenue growth trajectory as well as a supportive EBITDA margin.

Source: Technoprobe company presentation November 2022

Technoprobe is vertically integrated with the R&D center and internal house production. This coupled with almost 3k employees (up by 500 since January 2022) and more than 500 patents will support the company’s growth in the years to come. Whereas FormFactor is planning to reduce its workforce by approximately 13% to reduce SG&A expenses. This was reported by the company’s CFO during the Q3 earnings call . Going back to Technoprobe, thanks to new employees in the R&D area, the company is working on many strategic initiatives to support our macro key takeaways.

Source: Technoprobe company presentation November 2022

Q3 results comps

Starting with FormFactor, at the nine months aggregate, the company delivered a 3% top-line sale increase. Technoprobe reached a plus 57.4%, totaling €428 million compared to FormFactor which reported $581 million in turnover. On the gross margin, the US company stood at 39%, whereas the Italian one confirmed its results at more than 60%. For the above reason, Technoprobe's EBITDA margin (adjusted for IPO costs) was at 45.8%. What is more interesting is the fact that Technoprobe raised its expectation on sales for Q4, while FormFactor released a lower Q4 outlook.

Source: Technoprobe Q3 results

Source: FormFactor Q2 results presentation

Source: FormFactor Q3 results presentation

Conclusion and Valuation

Regarding the valuation, we are not making any new adjustments to FormFactor's target price. Based on a price-earnings ratio of 20x with a 2023 EPS of $1.25, we derive a valuation of $25 per share. In our risk/rewards assessment, our preference is toward the Italian leading player and so we confirm our neutral rating target on the US company. You can look at our previous coverage:

1. A Clear Winner
2. A Clear Winner Part 2
3. FormFactor: A Limited Upside

For further details see: