Chip stocks face pressure as AI returns are questioned
Traders who made bullish bets on the chip sector have faced a difficult month as the market questions how quickly the massive investments in AI will lead to real profits. As a company that sells the testing equipment needed for high-end AI chips, FormFactor is sensitive to these shifts in sentiment. If big tech companies slow down their data center buildouts, it could eventually lead to fewer orders for the testing hardware FormFactor provides.
The company is expected to report revenue of about 270 million dollars and earnings of 86 cents per share. This report will be an important check on whether the heavy spending on AI infrastructure is still translating into high demand for the advanced probe cards used to test complex chips. FormFactor has a history of performing well, having topped analyst expectations in six of its last eight quarters.
The new site is designed to help the company keep up with the rising demand for probe cards, which are the specialized tools used to verify that chips work correctly before they are packaged. By expanding its manufacturing footprint, the company is better positioned to support customers who are building increasingly complex AI and high-performance computing chips. This move suggests management remains confident that the current growth in chip testing requirements is a long-term trend rather than a temporary spike.
Partnership with Teradyne to speed up AI chip testing
The two companies will work together to create more efficient ways to test the next generation of AI and high-performance chips. Teradyne is a major player in automated test equipment, and by pairing its systems with FormFactor's advanced probe cards, they aim to help chipmakers bring complex new designs to market faster. For FormFactor, this collaboration reinforces its role as a necessary partner in the high-end semiconductor supply chain.
Management has beaten its own forecasts for a year straight as the business outruns even bullish expectations. This suggests the team sets a low bar while the surge in AI chip testing provides a tailwind they can easily clear.
Earnings history
EstimateBeatMiss
FormFactor past earnings results
Expected
Actual
Surprise
EPS
$0.61
$0.82
+34.6%
Revenue
$240M
$258M
+7.6%
Key highlights
Profitability outlook rising: Management expects non-GAAP profit for the third quarter to reach $0.86 per share at the midpoint, which is higher than the $0.82 earned this quarter. This guidance suggests the business will continue its momentum from a quarter where adjusted profit tripled compared to the $0.27 per share reported a year ago.
Gross margins expanding: The company reported non-GAAP gross margin, which is the percentage of revenue left after direct costs of making products, of 53.3%. This is a significant jump from 38.5% in the same quarter last year, reflecting better execution and a more profitable mix of products.
AI memory demand accelerating: Growth was driven by strong demand for High Bandwidth Memory and advanced packaging, which helped push total revenue up 31.9% year over year to $258.2 million. These technologies are essential for high-performance computing and artificial intelligence chips.
Strong cash generation: Free cash flow, the cash left after the company pays for its operations and equipment, rose to $52.6 million this quarter. This is a major recovery from a loss of $47.1 million a year ago and shows the business is becoming more efficient at converting sales into actual cash.
Revenue growth continuing: The company expects third-quarter revenue to be $270 million, plus or minus $10 million, which would be another record level for the business. This forecast is based on ongoing strength in the systems division and foundry logic, which refers to the part of the business that tests complex computer processors.
Our take: A very strong quarter that shows the company is finally hitting its stride in the AI era. FormFactor is successfully turning high demand for specialized memory and advanced chips into much higher profit margins. This performance reinforces the case that the business is becoming more efficient and more essential to the semiconductor supply chain.
FormFactor’s next earnings date
Q3 2026
OCT
28
Expectation
EPS
$0.86
Revenue
$271M
Metrics we are tracking
Metric
Expectations
Status
Non-GAAP Gross Margin
Holding or exceeding the 54% long-term target through FY2027
53.3% in Q2 2026
DRAM Revenue Growth
Sustaining double-digit growth driven by HBM and DDR5 demand
Record levels in Q2 2026
Free Cash Flow Margin
Staying above 15% of revenue as restructuring costs conclude
20.4% in Q2 2026
Systems Segment Revenue
Growing at or above 10% annually to diversify the business
$51M in Q2 2026
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