FORMFACTOR INC (FORM) stock intrinsic value fair value estimate & owner earnings analysis

FormFactor makes probe cards and test systems used to test semiconductor wafers before they are cut into chips, primarily for memory (DRAM, including high-bandwidth memory used in AI accelerators) and logic/foundry customers. Its two largest customers, SK Hynix and Intel, together made up roughly 38% of fiscal 2025 revenue, so its results move closely with those two companies' own capital spending. We measure the business on owner earnings: cash generated from operations, after subtracting stock-based compensation (a real cost, even though it does not use cash) and the capital spending needed just to maintain today's capacity (as opposed to spending aimed at growing it). Looking at owner earnings per share over the last nine fiscal years (2017-2025), which spans a full industry cycle including the 2023 memory downturn and the current AI/HBM-driven recovery, the typical (median) year produced about $0.91 per share. We use that full-cycle typical year, not the most recent print, as the starting point for our valuation, because recent results are running well above it on the current HBM upswing. One accounting note: FormFactor sold its China operations in two steps (2023 and 2024), producing large one-time accounting gains that inflated reported net income in those years. We exclude these because they show up as reversals in the cash flow statement and never represent recurring earning power. Separately, 2025 capital spending nearly tripled because of a one-time purchase of a new manufacturing facility in Texas; we treated most of that spending as a one-time investment in future capacity rather than an ongoing cost, since folding it in as an ordinary cost would understate the company's normal earning power. Our base case assumes continued, moderating growth as HBM-driven demand persists but historical industry cyclicality reasserts itself with a pause mid-decade, similar to past patterns. Our bear case (roughly a one-in-ten outcome) assumes SK Hynix and/or Intel sharply cut capital spending as they did in 2023, compounded by underutilized capacity at the new Texas facility weighing on margins, with only slow recovery. Our bull case assumes FormFactor's probe-card technology continues winning content as HBM stacks grow taller, and that its stated effort to diversify beyond its two largest customers succeeds. Because this is a durable tooling business tied to the ongoing need to test chips, we did not assume it disappears after our 10-year forecast window; we assumed a modest, low-single-digit sustainable growth rate beyond that reflects continued, but slowing, industry demand. That said, more than two-thirds of our estimated value in the base and bull cases depends on this assumption about the business a decade or more out, which is inherently less certain than the next few years, and we flag that plainly here. On this basis we estimate the shares are worth roughly $30 in the base case, with a range of about $11 in a downturn scenario to about $62 if growth and diversification both go well. Given the wide range between our downside and typical case - a reflection of real customer concentration and cyclicality risk, not a lack of research - the margin-of-safety price sits meaningfully below our base-case estimate, at around $17 per share, to allow for the downside case.