A consumable that got expensive

FormFactor sells probe cards: dense arrays of microscopic contacts that touch a chip while it is still on the wafer and test it electrically, before anyone spends money packaging it. For most of the past decade this was an unglamorous consumable business earning a gross margin in the high thirties. In the June quarter the company kept 50.7 cents of gross profit on each revenue dollar, against 37.2 cents a year earlier — four consecutive quarters of expansion totaling 13.5 points.

The mechanism is mix, not pricing power in the ordinary sense. Testing a stack of high-bandwidth memory (HBM) dies requires far more contacts, far tighter placement and data rates above 10 gigabits per second, and an advanced card of that kind sells for several times a legacy one. So a shift in what FormFactor ships lifts revenue per wafer tested without a matching rise in cost. DRAM probe-card revenue rose 48.9% year on year to $85m, with HBM about two-thirds of it, and two customers adopted a full-wafer contactor that tests hundreds of stacks at once.

Revenue grew 31.9% to $258.2m. Operating income grew 370%, taking operating margin to 22.4% from 6.3%. Management guided the September quarter to $270m and said the constraint on further share gain is its own capacity, not orders — a new Texas plant ramps from the fourth quarter through 2028, with capex of $140-170m this year. Its co-packaged-optics revenue, a second test market, was raised from $10-20m for the full year to more than $20m by the end of September. FormFactor competes for this work mainly with the Japanese card makers MJC and JEM; it has three HBM customers and strong position at two of them.

The four sessions that made the month

Measured to 17 August, the seven sub-fab and test suppliers grouped with FormFactor were up almost 3% on the month, with FormFactor itself up 22%. Then the bond market moved: the 30-year Treasury yield approached 5.33%, a two-decade high, and the Philadelphia Semiconductor Index fell more than 5% on 18 August. Over four sessions every one of these names fell between 13.8% and 20.8%. This rung of the supply chain books revenue against 2027 and 2028 capacity plans, which is precisely the duration a higher discount rate punishes hardest.

So the multiple compressed while the profits rose. FormFactor's price per dollar of trailing gross profit is 21.0x, down from 28.2x on 21 May and 23.7x in February, even as trailing gross profit rose 16% in one quarter. It trades at 37.5x forward earnings against 77.1x trailing, the gap being consensus for earnings of $3.05 this year against $1.13 last.

Where the numbers agree with the selling

Ichor Holdings, which builds the gas and chemical delivery panels that meter reagents into etch and deposition chambers for equipment makers, is the exception. It grew revenue 22.7% to $294.8m and raised full-year guidance to at least 30% growth. But it keeps 13.9 cents of gross profit per revenue dollar — against MKS's 47.7 — turned that into $1.0m of net income, and burned $15.9m of operating cash building inventory. It sold $200m of stock at $80.70 a share, 39% above where it now trades. Lam Research and Applied Materials together were 76% of 2025 sales. At 19.7x trailing gross profit it sits exactly where it did in February, and at more than twice the multiple of Ultra Clean Holdings, which does comparable made-to-print work for the same buyers.

MKS Instruments — vacuum, flow control, radio-frequency power and, since the Atotech deal, plating chemistry — accelerated to 28.3% revenue growth from 15.2% in March, guided September semiconductor revenue to better than 50% growth, and cut net leverage to 3.0x from 4.0x on $188m of quarterly free cash flow. Its price per dollar of gross profit fell from 11.9x in May to 9.8x.

The supposed cyclical laggards held up better than the artificial-intelligence names, which inverts the usual framing. Cohu, a back-end test-handler maker long described as automotive-levered, saw automotive revenue fall 24% while computing orders rose 150% to 46% of system orders; it raised full-year growth guidance to about 35%. Axcelis, which makes ion implanters, is the genuine laggard: gross margin fell to 42.4% from 44.9% and operating income dropped 30% on 10.6% revenue growth. Its forward price-to-gross-profit, 10.7x, sits above its trailing 10.4x — consensus expects the gross profit line to shrink.

The demand behind all of it is memory capital spending rather than logic wafer starts: SEMI forecasts DRAM equipment spending up 29% to $37bn this year.

The setup

Where it stands — FormFactor's margin and HBM mix improved through the June quarter while its multiple against gross profit fell roughly a quarter since May.

Would confirm — September-quarter revenue at or above the $270m guide with GAAP gross margin holding above 50%.

Would invalidate — DRAM probe-card revenue falling below $85m as mix reverts toward commodity DDR cards.

Watch next — FormFactor's third-quarter report in late October, and whether co-packaged-optics revenue passed $20m.

Valuation — 21.0x trailing gross profit and 18.9x forward, against 28.2x trailing in May and 23.7x in February.