Today we have a speculative idea: take shares in semiconductor business FormFactor (NASDAQ: FORM), in order to make money on his growth.
Growth potential and validity: 15% behind 14 Months; 25% behind 2 of the year; 9% per annum during 15 years.
Why stocks can go up: because the company's products are in high demand.
How do we act: we take shares now by 40 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
We love, appreciate,
Investment editorial office
What the company makes money on
FORM designs and manufactures components and systems, which are needed in the production of semiconductors. According to the company's annual report, its revenue is divided into two segments.
Trial Cards — 83,8%. These are things, which allow further testing of the chip. By areas of application, the company's revenue from cards is divided as follows::
- Production of silicon wafers and chips, performing logical tasks, — 64,3%.
- DRAM chips - 15,8%.
- Flash memory - 3,7%.
Segment gross margin — 45,2% from its proceeds.
Systems — 16,2%. This is semiconductor test equipment, as well as systems for the production of tools needed in this area. Segment gross margin — 46,3% from its proceeds.
Revenue by country and region:
- China - 25,2%.
- Taiwan - 21,7%.
- USA - 18,4%.
- South Korea - 12,5%.
- Europe - 9,5%.
- Japan - 6,3%.
- Asia-Pacific countries not mentioned before - 4,8%.
- Unnamed countries and regions -1.6%.
Arguments in favor of the company
Fell down. Since April 2021, the company's shares have significantly fallen in price: with 50 to 40 $. Means, you can take them in anticipation of a rebound.
semiconductor boom. Rising chip prices and the resulting boom in production will stimulate demand for FORM solutions - which will keep it working for a long time.
Acceptable price. P / S company about 4, a P / E 37 - albeit a big one, but still not insanely big. Its capitalization is very small - 3.13 billion dollars. All this creates good conditions for attracting investors to these shares..
Clean accounting. More than enough money at the disposal of the company, to close all its long-term and short-term debts in the amount of 204.7 million: 151 million dollars on accounts and 115.541 million debts of counterparties. It's good, because in an era of raising rates and more expensive loans, investors will look for “good, heavy debt-free margin businesses".
Can buy. Considering all of the above, the company may well be bought by a larger enterprise. And given the trend towards the growth of investments in the renewal of fixed assets in the semiconductor industry, it's more than a logical decision for some large semiconductor company. In its niche of trial cards and systems, FORM occupies 31% market. As a division of a larger company, FORM will look very organic.
What can get in the way
Concentration. According to the company's annual report, a disproportionately large percentage of its revenue comes from Intel - 31,5%. A change in relationship with this major client could negatively impact FORM's business.
Will have to fight. Specialization of the company requires extensive investment: from 2017 to 2021, the share of investments in the renewal of fixed assets at FORM increased from 3,2 to 8,6%. Company representatives say, that they want to reduce this figure to 3.5-4%.
But I think, that they might not get it: Italian competitors from Technoprobe outperform FORM both in terms of revenue growth, as well as margin. In order not to lose market share and not lose out in the long run, FORM, probably, will have to expand aggressively – and this will be very difficult to do without large debts.
China. A large share of the company's sales go to China, and if the US administration puts pressure on Chinese tech companies, then FORM will have a hard time.
memorize everything. A significant share of revenue - over 15% — the company is driven by demand from DRAM chip manufacturers. Given the recent price cuts for this type of chips, demand from customers in this area may fall, which will somewhat spoil the overall performance of the company's reporting. FORM is still not cheap, therefore, the risks of a significant decline in quotes due to the report, which somewhat did not meet the inflated expectations of investors, seems very real to me.
What's the bottom line?
Shares can be taken now by 40 $. Then there are three options:
- wait 46 $. Think, we will reach this level in the next 14 Months;
- wait for stocks to return to level 50 $. Better get ready to wait here 2 of the year;
- hold shares 15 years, hoping that, that the company will become a hegemon in its niche.
