In the mammoth semiconductor industry, which features giants such as Intel (NASDAQ:INTC), Advanced Micro Devices (NYSE:AMD), and Texas Instruments (NYSE:TXN), each sporting market caps in the tens if not hundreds of billions of dollars, it's easy to miss a hidden small cap such as FormFactor (NASDAQ:FORM), which sports a valuation of only $850 million.
Yet tiny gems like FormFactor are the reason Intel, Infineon (NYSE:IFX), or even IBM (NYSE:IBM) is able to provide us with the computers and consumer electronic devices that we've come to rely upon. The big semiconductor companies make the chips that power those devices, and FormFactor tests them to make sure they work.
Testing is profitable business, and FormFactor, which just went public last year and immediately vaulted to the top of the industry, is proof of it. Third-quarter revenues showed a 97% increase over last year's results, the third straight quarter of nearly doubling revenues.
The semiconductor industry is highly cyclical, and this year was particularly strong as it climbed out of the worst downturn it had seen. But analysts predict that next year will be flat, and there might even be a dip in 2006 before surging again. Yet that should make little difference to this industry-leading maker of probe cards.
During its conference call, the company noted that these are extraordinary times in the industry. Chip manufacturers are transitioning to smaller and smaller chips, trending down to 90 nm in size, while the size of the wafer from which the chips are cut is growing, from 200 mm to 300 mm. Additionally, memory -- both dynamic random access memory (DRAM) for PCs and flash memory for things such as cell phones and digital cameras -- is changing to new architectures. All of these design changes create superheated demand for FormFactor's products.
When Tom Engle and I recommended FormFactor for The Motley Fool's Hidden Gems newsletter back in June, we noted that even as the rest of the industry was caught in a tailspin four years ago, this tiny tester of tiny chips was still churning out 30% revenue growth. So despite the rest of the semiconductor industry showing signs of slowing down, FormFactor can continue to expect sizeable gains.
Earlier this year, the company was constrained by its capacity. It had to turn away work in another segment of the memory market, flip chip logic, because DRAM and flash memory demand was so high. It now has a new facility on line that will allow the company to meet the needs of all memory manufacturers, and it was even able to pay for it without reducing its cash position.
There are companies such as Kulicke & Soffa (NASDAQ:KLIC) that design competing products, but they are a fading breed, relying upon yesterday's technology and revising earnings guidance down even as FormFactor sees significant growth ahead. Certainly FormFactor can't continue to double its revenues every quarter, though guidance for the fourth quarter is for growth of around 65% year over year.
It may not be a giant in the semiconductor industry, but FormFactor provides the shoulders upon which the industry stands.
Fool contributor Rich Duprey recommended FormFactor for Hidden Gems along with Tom Engle. He also owns shares in the company but does not own any of the other stocks mentioned in this article.
