Allegro MicroSystems (NASDAQ:ALGM) Q3: Beats On Revenue, Guides For Strong Sales Next Quarter

Radek Strnad /
2023/01/31 7:10 am EST
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Chip designer Allegro MicroSystems (NASDAQ:ALGM) reported Q3 FY2023 results beating Wall St's expectations, with revenue up 33.3% year on year to $248.7 million. Guidance for next quarter's revenue was $265 million at the midpoint, 5.05% above the average of analyst estimates. Allegro MicroSystems made a GAAP profit of $64.5 million, improving on its profit of $32.9 million, in the same quarter last year.

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Allegro MicroSystems (ALGM) Q3 FY2023 Highlights:

  • Revenue: $248.7 million vs analyst estimates of $245.2 million (1.46% beat)
  • EPS (non-GAAP): $0.35 vs analyst estimates of $0.32 (9.6% beat)
  • Revenue guidance for Q4 2023 is $265 million at the midpoint, above analyst estimates of $252.2 million
  • Free cash flow of $38.8 million, up 12.7% from previous quarter
  • Inventory Days Outstanding: 102, up from 85 previous quarter
  • Gross Margin (GAAP): 57.3%, up from 54.2% same quarter last year

“Our team delivered another quarter of record results. Momentum in e-Mobility applications, including xEV and ADAS, as well as strong demand across our magnetic sensor and power IC product portfolios continues to drive growth,” 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 15.2% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $186.6 million to $248.7 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).

Allegro MicroSystems Total Revenue

This was a good quarter for Allegro MicroSystems as revenues grew 33.3%, topping analyst estimates by 1.46%. This marks 9 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 32.3% YoY next quarter, and Wall St analysts are estimating growth 13.1% 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.

Allegro MicroSystems Inventory Days Outstanding

This quarter, Allegro MicroSystems’s inventory days came in at 102, one day above the five year average, showing that despite the recent increase there is no indication of an excessive inventory buildup at the moment.

Key Takeaways from Allegro MicroSystems's Q3 Results

With a market capitalization of $6.58 billion Allegro MicroSystems is among smaller companies, but its more than $334.3 million in cash and positive free cash flow over the last twelve months give us confidence that Allegro MicroSystems has the resources it needs to pursue a high growth business strategy.

We were impressed by how strongly Allegro MicroSystems outperformed analysts’ earnings expectations this quarter. And we were also glad to see the improvement in operating margin. 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 flat on the results and currently trades at $34.8 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.

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The author has no position in any of the stocks mentioned.