Allegro MicroSystems (ALGM) is in the fast lane as the chipmaker leverages its strength in the automotive industry into new markets. ALGM stock also has surged to record heights amid accelerating sales and earnings growth.
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The Manchester, N.H.-based company makes magnetic sensing and power management chips. Last year, 69% of its sales came from the automotive market. Meanwhile, industrial was its second largest market at 19% of sales.
“We’re really an automotive-first company,” Chief Executive Vineet Nargolwala said at the company’s recent analyst day. “We got our start in automotive decades ago, and our ICs (integrated circuits) have always been critical to the safe and efficient operation of vehicles.”
Allegro has seen its chip content in automobiles grow as the industry moves to electric vehicles, or EVs, and adds advanced driver-assistance systems, he said.
“E-mobility as a total market represents a $4 billion opportunity for Allegro,” Nargolwala said. “Our content opportunity on EVs is twice that on internal combustion engine-driven vehicles, approaching $100 a vehicle.”
ALGM Stock Near All-Time High
Allegro MicroSystems also has a growing business in clean energy, industrial automation and data center markets, he said.
ALGM stock went public in October 2020 with its initial public offering priced at $14 a share. It hit a record intraday high of 48.69 on April 3. Later that day, Allegro stock ended the regular session at 47.86.
The company’s automotive pedigree gives it an advantage in markets like wind and solar energy, EV charging stations, and factory robotics, Nargolwala said.
“Both the automotive and industrial markets are being transformed by the megatrends of electrification and automation that are going to play out over the next decade,” he said.
The company’s experience making automotive-grade semiconductors shows that it can produce chips that can withstand extreme conditions with a very low failure rate. That also includes running at high temperatures for long periods, Chief Technology Officer Michael Doogue said at the analyst day.
‘Under-The-Radar’ Chip Stock
Allegro’s chips are used in automotive powertrains, braking and steering systems. It counts all the major carmakers as customers, but no one buyer accounts for more than 10% of sales.
In calendar 2022, 62% of Allegro’s sales came from magnetic sensor products and 38% was from power chips. Meanwhile, its sensor chips enable customers to precisely measure motion, speed, position and electrical current. Also, its power chips enable high-temperature and high-voltage capable motor drivers and power management.
“Allegro MicroSystems presents an under-the-radar beneficiary of two simultaneous transformations within the mobility space: electrification and intelligence/autonomy,” TD Cowen analyst Joshua Buchalter said in a recent note to clients.
Buchalter rates ALGM stock as outperform with a price target of 52. Further, he called it a “top pick” among small- and mid-cap stocks.
“Allegro’s exposure to powerful secular content themes and profitable growth are a rare combo in the SMID-cap space and should not be overlooked,” Buchalter said.
Accelerating Sales, Earnings Growth
Allegro MicroSystems has posted four straight quarters of accelerating sales growth. Its earnings growth has accelerated for the last two quarters.
In its fiscal third quarter ended Dec. 23, Allegro earned an adjusted 35 cents a share on sales of $248.8 million, beating Wall Street’s estimates. On a year-over-year basis, Allegro’s earnings jumped 84% while sales increased 33%.
For the quarter that just ended March 31, Allegro predicts adjusted earnings of 36 cents a share on sales of $265 million. That would translate to growth of 71% in earnings and 32% in sales.
For fiscal 2023, analysts polled by FactSet expect Allegro to earn $1.27 a share, up 63%, on sales of $969.1 million, up 26%.
Allegro’s content growth story in automotive and industrial markets should fuel low double-digit percentage annual revenue growth through fiscal 2028, Needham analyst Quinn Bolton said in his recent note to clients. The company also sees adjusted gross profit margins increasing to over 58% in the next three to five years, up from 55.6% for fiscal 2022.
Bolton rates ALGM stock as buy with a price target of 50.
ALGM Stock On Four IBD Lists
Allegro MicroSystems is on four IBD stock lists, including the IBD 50, Leaderboard, IPO Leaders and Tech Leaders stock lists.
ALGM stock is tied for first place in IBD’s fabless semiconductor industry group, according to IBD Stock Checkup. Further, it has a best-possible IBD Composite Rating of 99.
Industry peers with the same perfect Composite Rating include Broadcom (AVGO) and Impinj (PI). Also on the list are Lattice Semiconductor (LSCC), Monolithic Power Systems (MPWR) and Rambus (RMBS).
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
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