Chip designer Allegro MicroSystems (NASDAQ:ALGM) fell short of analysts' expectations in Q3 FY2024, with revenue up 2.5% year on year to $255 million. Next quarter's revenue guidance of $235 million also underwhelmed, coming in 8.4% below analysts' estimates. It made a non-GAAP profit of $0.32 per share, down from its profit of $0.35 per share in the same quarter last year.
Allegro MicroSystems (ALGM) Q3 FY2024 Highlights:
- Market Capitalization: $4.99 billion
- Revenue: $255 million vs analyst estimates of $256.8 million (0.7% miss)
- EPS (non-GAAP): $0.32 vs analyst estimates of $0.29 (10.7% beat)
- Revenue Guidance for Q4 2024 is $235 million at the midpoint, below analyst estimates of $256.6 million
- Free Cash Flow of $42.16 million, up 171% from the previous quarter
- Inventory Days Outstanding: 124, down from 136 in the previous quarter
- Gross Margin (GAAP): 52.5%, down from 57.3% in the same quarter last year
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.
Allegro MicroSystems's revenue growth over the last three years has been strong, averaging 23.8% annually. But as you can see below, this quarter wasn't particularly strong, with revenue growing from $248.8 million in the same quarter last year to $255 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 had a tough quarter as its weak 2.5% year-on-year revenue growth missed analysts' estimates by 0.7%. This was its third consecutive quarter of decelerating growth, indicating a potential cycle downturn.
Allegro MicroSystems's revenue growth has decelerated over the last three quarters and its management team projects revenue to fall next quarter. As such, the company is guiding for a 12.8% year-on-year revenue decline while analysts are expecting a 0.6% drop over the next 12 months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity 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 DIO came in at 124, which is 17 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Allegro MicroSystems's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 52.5% in Q3, down 4.8 percentage points year on year.
Over the last 12 months, Allegro MicroSystems has seen its already high gross margins rise, averaging 56%. These margins are indicative of its solid competitive offering, disciplined cost controls, and relatively low pricing pressure.
Allegro MicroSystems reported an operating margin of 27.2% in Q3, down 3.2 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Allegro MicroSystems's operating margins have been trending up over the last year, averaging 29.9%. On top of that, the company's margins are around the midpoint for the semiconductor industry, suggesting that its cost structure is appropriately managed.
Earnings, Cash & Competitive Moat
Wall Street expects earnings per share to decline 14.1% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Allegro MicroSystems's free cash flow came in at $42.16 million in Q3, up 6.7% year on year.
As you can see above, Allegro MicroSystems produced free cash flow of just $79.79 million in the last year, resulting in a measly 7.6% free cash flow margin. Allegro MicroSystems will need to improve its free cash flow conversion if it wants to stay competitive.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.
Enter ROIC, a metric showing how much operating profit a company generates relative to its invested capital (debt and equity). ROIC not only gauges the ability to grow profits but also a management team's ability to allocate limited resources.
Allegro MicroSystems's five-year average ROIC was 18.1%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+. Its returns suggest it historically did a subpar job investing in profitable growth initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, Allegro MicroSystems's ROIC has averaged a 16.9 percentage point increase each year. This is a good sign, and if Allegro MicroSystems's returns keep rising, there's a chance it could evolve into an investable business.
Key Takeaways from Allegro MicroSystems's Q3 Results
We were impressed by Allegro MicroSystems's EPS beat this quarter. We were also glad its inventory levels shrunk. On the other hand, its revenue and EPS guidance for next quarter missed analysts' expectations, and its gross margin shrunk. Its revenue also missed slightly, but its Automotive segment showed strength, driven by a 45% year-on-year increase in its e-Mobility applications. Overall, this was a mediocre quarter for Allegro MicroSystems. The company is down 1.7% on the results and currently trades at $25.5 per share.
Is Now The Time?
When considering an investment in Allegro MicroSystems, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We cheer for everyone who's making the lives of others easier through technology, but in the case of Allegro MicroSystems, we'll be cheering from the sidelines. Although its revenue growth has been strong over the last three years, Wall Street expects growth to deteriorate from here. And while its gross margins are suggestive of good pricing power, the downside is its low free cash flow margins give it little breathing room. On top of that, its mediocre ROIC suggests it has grown profits at a slow pace historically.
Allegro MicroSystems's price-to-earnings ratio based on the next 12 months is 20.7x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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