Despite the lousy environment for semiconductor stocks lately, a couple of semiconductor IPOs have been thrust out onto the market this month. I wrote about Techwell (NASDAQ:TWLL) yesterday. Today it's Verigy's (NASDAQ:VRGY) turn.

Agilent (NYSE:A) spun out shares of Verigy in an IPO on June 13. Verigy supplies equipment for testing the full spectrum of semiconductor chips, including advanced designs like system-on-chips (SOCs, in which a number of separate functions are combined on a single chip), system-in-package designs (SIPs, in which several die are packaged together), and high-speed memory. According to IT research and advisory firm Gartner, SOCs and SIPs composed 62% of the 2005 test market, with 30% for memory testing and the remaining 8% for testing less complex chips.

The boom in flash memory has been a boon for Verigy. The number of megabits of flash memory shipped doubled every year from 2000 through 2005; this year, it's expected to triple. Unsurprisingly, Verigy's revenues have grown strongly. In the quarter ended April 30, 2006, they totaled $192 million -- up 92% from $100 million in the prior year. Orders grew even more dramatically, with new orders reaching $313 million, more than tripling the year-ago $95 million.

Verigy still hasn't turned a profit, but it's almost there. If it weren't for separation costs associated with the spinoff from Agilent, the company would have recorded a small profit during the April quarter.

Given the strong growth in orders and sales in the first part of this year, why are the shares are languishing close to the IPO price of $15 -- a price that was lower than the hoped-for range of $16-$18? I can think of two reasons, and the first relates to weakness in the NAND flash memory market. NAND flash prices have fallen precipitously this year, and some people expect that the rate of NAND flash capacity expansion will have to be drastically curtailed. (Note that this isn't a universal opinion). If so, Verigy would certainly experience headwinds.

The second issue pertains to Agilent's plans to distribute its remaining 85% stake in Verigy to shareholders by the end of October. It's not too hard to imagine what will happen when five-and-a-half times as many shares are suddenly available to the public -- investors will surely sell many of them.

Verigy may be a company worth following, but I will leave it to you to decide whether the potential rewards favorably balance its current risks. If you're seeking a comparison, its publicly traded competitors include Teradyne (NYSE:TER), Credence Systems (NASDAQ:CMOS), and Advantest (NYSE:ATE).

If the memory market defies the skeptics, and Microsoft's (NASDAQ:MSFT) Windows Vista can drive PC demand next year, Verigy's profits may grow strongly. Nevertheless, the semiconductor test market is strongly cyclical and competitive. I'm more inclined to wait until a poor outlook further depresses Verigy's share price.

Test out further Foolishness:

Microsoft is a Motley Fool Inside Value pick. For more smart buys from Wall Street's bargain bin, sign up today for a free 30-day guest pass.

Fool contributor Dan Bloom has no financial interest in any company mentioned in this article. He welcomes your comments.