For advanced wafer probe card maker FormFactor (NASDAQ:FORM), 2006 was really a year of transition. It was the first full year that its new high-capacity manufacturing facility was online, and everyone was watching to see if there would be any miscues like the ones experienced when the company made a switchover at its old plant.

While expectations were high for FormFactor, the analyst community just wasn't prepared for the results the company turned out in 2006, when revenues and earnings consistently beat not only their own numbers, but management expectations as well.

Investors caught the enthusiasm, too, and bid shares up as each new quarter brought better and better results. The share price had doubled by August, and though prices had eased back by the time of the third-quarter earnings report, management's muted forecasts for the fourth quarter caused the stock to fall, and it now sits some 30% below its highs.

The future
With a full year of production at its new plant under its belt, what can we expect from this industry leader that can propel both the business and its stock forward?

Although it sounds like something you'd expect to hear from a football coach, FormFactor's one-touchdown Harmony probe card could very well reshape the integrated circuit test industry. In previous versions, a probe card had to touch the computer chip several times to complete all the tests necessary to ensure a chip was functional. FormFactor's four-touchdown probe cards were already a huge advance over competitor cards that required 16 or 32 touchdowns, but there was still the potential to damage the card each time the probe card touched the chip.

By reducing the number of times the card touched the chip to just one, it substantially removed that concern from consideration.

Substantially, but not completely. Apparently there is lingering worry that should the Harmony probe card damage the chips in that one touch test, chip production would crawl to a halt. It may make for slower adoption of the probe card than previously anticipated.

Demand is still strong from customers for its older products, so its new facility can generate revenues in excess of $100 million per quarter, with a goal of $150 million. Yet to be closer to its customers, many of whom are located in the Far East, FormFactor will construct a plant in Singapore that should enable total revenues to reach as much as $200 million per quarter.

So we have a potential drag on earnings throughout 2007, but the promise of dramatically growing revenues in 2008 and beyond.

It should be enough to keep it ahead of rivals like Cascade Microtech (NASDAQ:CSCD) and Japan Electronic Materials, SV Probe, or Phicom.

Staying true to form
FormFactor has always been richly valued, and even though the stock is trading at 30% lower than the 52-week high it hit back in August, you can't say that it's still not receiving lofty valuations. Regardless of how you look at it, whether it's on a price-to-earnings basis (45), price-to-book (3.82), or enterprise value-to-EBITDA (20.6), FormFactor is viewed as being rich.

That's why the run-up to August's highs was seen as unsustainable. At Motley Fool Hidden Gems, where the company is a recommendation, fellow Fool Jim Gillies had argued that it was overpriced. Though I had a bit of a smug look on my face when the stock ran up to nearly $50 a share, it turns out he was more right than wrong, if only a little early. Yet I might argue again with his thesis that FormFactor is priced to perfection even at these levels.

I think some of the response to third-quarter performance had to do with some of the overhang from its secondary offering. Certainly earnings per share were diluted by the additional shares offered, but the company has a huge bankroll and has said that it plans to use the proceeds to make acquisitions.

It doesn't need the cash to build its new plants because it can do that out of its operating cash flows. The money can help it expand immediately, say with the acquisition of another manufacturer.

Final thoughts
To this Fool, it seems like talk of revenues of $110 million, $150 million, or even $200 million per quarter might be too short-sighted, particularly if you're looking for FormFactor to achieve that in late 2007 or early 2008. It could end up happening a lot faster than that.

With analysts expecting 21% growth this year and long-term growth of 25%, it seems as though they are no longer trying to underestimate the potential and are weighing the possibility that 2007 could be a breakout year.

Check out the other companies featured in " The Motley Fool's 2006 in Review and 2007 Preview" special.

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Fool contributor Rich Duprey owns shares of FormFactor but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.