Chip designer Allegro MicroSystems (NASDAQ:ALGM) reported Q4 FY2023 results beating Wall St's expectations, with revenue up 34.5% year on year to $269.4 million. Guidance for next quarter's revenue was $275 million at the midpoint, 7.02% above the average of analyst estimates. Allegro MicroSystems made a GAAP profit of $62 million, improving on its profit of $25.7 million, in the same quarter last year.
Is now the time to buy Allegro MicroSystems? Access our full analysis of the earnings results here, it's free.
Allegro MicroSystems (ALGM) Q4 FY2023 Highlights:
- Revenue: $269.4 million vs analyst estimates of $265.0 million (1.67% beat)
- EPS (non-GAAP): $0.37 vs analyst estimates of $0.36 (2.73% beat)
- Revenue guidance for Q1 2024 is $275 million at the midpoint, above analyst estimates of $257.0 million
- Free cash flow of $17.3 million, down 56.1% from previous quarter
- Inventory Days Outstanding: 137, up from 102 previous quarter
- Gross Margin (GAAP): 62.7%, up from 54.9% same quarter last year
“We delivered a strong finish to fiscal year 2023, including record fourth quarter sales of $269 million, up 35% year-over-year. We also achieved record non-GAAP diluted earnings per share of $0.37, an increase of more than 75% year-over-year,” said Vineet Nargolwala, President and CEO of Allegro MicroSystems.
The result of a spinoff from Sanken in Japan, Allegro MicroSystems (NASDAQ:ALGM) is a designer of power management chips and distance sensors used in electric vehicles and data centers.
The biggest demand drivers for processors (CPUs) and graphics chips at the moment are secular trends related to 5G and Internet of Things, autonomous driving, and high performance computing in the data center space, specifically around AI and machine learning. Like all semiconductor companies, digital chip makers exhibit a degree of cyclicality, driven by supply and demand imbalances and exposure to PC and Smartphone product cycles.
Sales Growth
Allegro MicroSystems's revenue growth over the last three years has been mediocre, averaging 16.8% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $200.3 million to $269.4 million. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
This was a strong quarter for Allegro MicroSystems as revenues grew 34.5%, topping analyst estimates by 1.67%. This marks 10 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.
However, Allegro MicroSystems believes the growth is set to continue, and is guiding for revenue to grow 26.3% YoY next quarter, and Wall St analysts are estimating growth 9.05% over the next twelve months.
In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.
This quarter, Allegro MicroSystems’s inventory days came in at 137, 33 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.
Key Takeaways from Allegro MicroSystems's Q4 Results
With a market capitalization of $7.04 billion Allegro MicroSystems is among smaller companies, but its more than $351.6 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.
We were very impressed by the revenue and EPS beats vs. Consensus this quarter as well as the revenue and EPS guidance for next quarter above expectations. The improvements in Allegro MicroSystems’s gross and operating margins this quarter were other positives. On the other hand, it was less good to see the inventory levels increase. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is up 1.73% on the results and currently trades at $38.28 per share.
Allegro MicroSystems may have had a good quarter, so should you invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.
One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.
The author has no position in any of the stocks mentioned.