Semiconductor testing company FormFactor (NASDAQ:FORM) announced better-than-expected revenue in Q3 CY2024, with sales up 21.2% year on year to $207.9 million. On the other hand, next quarter’s revenue guidance of $190 million was less impressive, coming in 4.8% below analysts’ estimates. Its non-GAAP profit of $0.35 per share was also 11.7% above analysts’ consensus estimates.

Is now the time to buy FormFactor? Find out by accessing our full research report, it’s free.

“We are proud to have posted our all-time revenue record in the third quarter,” said Mike Slessor, CEO of FormFactor,

Company Overview

With customers across the foundry and fabless markets, FormFactor (NASDAQ:FORM) is a US-based provider of test and measurement technologies for semiconductors.

Semiconductor Manufacturing

The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers, and data storage. The need for technologies like artificial intelligence, 5G networks, and smart cars is also creating the next wave of growth for the industry. Keeping up with this dynamism requires new tools that can design, fabricate, and test chips at ever smaller sizes and more complex architectures, creating a dire need for semiconductor capital manufacturing equipment.

Sales Growth

A company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, FormFactor’s 6.1% annualized revenue growth over the last five years was mediocre. This shows it couldn’t expand in any major way, a tough starting point for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. FormFactor’s history shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 2.9% annually.

This quarter, FormFactor reported robust year-on-year revenue growth of 21.2%, and its $207.9 million of revenue topped Wall Street estimates by 3.8%. Management is currently guiding for a 13% year-on-year increase next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 10.5% over the next 12 months, an improvement versus the last two years. This projection is healthy and illustrates the market believes its newer products and services will fuel higher growth rates.

Unless you’ve been living under a rock, it should be obvious by now that generative AI is going to have a huge impact on how large corporations do business. While Nvidia and AMD are trading close to all-time highs, we prefer a lesser-known (but still profitable) semiconductor stock benefitting from the rise of AI. Click here to access our free report on our favorite semiconductor growth story.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, FormFactor’s DIO came in at 78, which is 16 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.

Key Takeaways from FormFactor’s Q3 Results

We were impressed by FormFactor’s strong improvement in inventory levels. We were also excited its EPS outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter missed analysts’ expectations and its EPS guidance for next quarter fell short of Wall Street’s estimates. Overall, we think this was still a decent quarter although the outlook is weighing on shares. The stock traded down 4.1% to $42 immediately following the results.

Should you buy the stock or not?We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.