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Allegro MicroSystems (NASDAQ:ALGM) Reports Strong Q2, Stock Soars


Full Report / October 27, 2022
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Chip designer Allegro MicroSystems (NASDAQ:ALGM) reported Q2 FY2023 results beating Wall St's expectations, with revenue up 22.7% year on year to $237.6 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $245 million at the midpoint, 5.08% above what analysts were expecting. Allegro MicroSystems made a GAAP profit of $50.6 million, improving on its profit of $33.2 million, in the same quarter last year.

Allegro MicroSystems (ALGM) Q2 FY2023 Highlights:

  • Revenue: $237.6 million vs analyst estimates of $225 million (5.61% beat)
  • EPS (non-GAAP): $0.31 vs analyst estimates of $0.26 (19.4% beat)
  • Revenue guidance for Q3 2023 is $245 million at the midpoint, above analyst estimates of $233.1 million
  • Free cash flow of $35.1 million, up 58.4% from previous quarter
  • Inventory Days Outstanding: 85, up from 82 previous quarter
  • Gross Margin (GAAP): 55.5%, up from 53.2% 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' peers and competitors include Analog Devices (NASDAQ: ADI) Texas Instruments (NASDAQ: TXN), Skyworks (NASDAQ:SWKS), Infineon (XTRA:IFX), NXP Semiconductors NV (NASDAQ:NXPI), ON Semi (NASDAQ:ON), Marvell Technology (NASDAQ:MRVL), and Microchip (NASDAQ:MCHP).

Sales Growth

Allegro MicroSystems's revenue growth over the last three years has been mediocre, averaging 13.3% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $193.6 million to $237.6 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 decent quarter for Allegro MicroSystems as revenues grew 22.7%, topping analyst estimates by 5.61%. This marks 8 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 even accelerate, and is guiding for revenue to grow 31.2% YoY next quarter, and Wall St analysts are estimating growth 15.8% over the next twelve months.

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 85, 16 days below the five year average, showing that despite the recent increase there is no indication of an excessive inventory buildup at the moment.

Pricing Power

Allegro MicroSystems's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 55.5% in Q2, up 2.3 percentage points year on year.

Allegro MicroSystems Gross Margin (GAAP)

Over the past year, Allegro MicroSystems has seen its already reasonably high gross margins continue to rise, averaging 54.7%, indicative of a solid competitive offering, efficient cost controls, and relatively low pricing pressure.

Profitability

Allegro MicroSystems reported an operating margin of 27.8% in Q2, up 3.8 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.

Allegro MicroSystems Adjusted Operating Margin

Operating margins have been trending up over the last year, averaging 24.8%. Allegro MicroSystems's margins remain towards the high end of semiconductor companies, driven by its efficient operating model's economies of scale.

Earnings, Cash & Competitive Moat

Analysts covering the company are expecting earnings per share to grow 21.4% over the next twelve months, although estimates are likely to change post earnings.

Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Allegro MicroSystems's free cash flow came in at $35.1 million in Q2, up 172% year on year.

Allegro MicroSystems Free Cash Flow

Allegro MicroSystems produced free cash flow of $107.4 million in the last year, which is 12.7% of revenue. It's good to see positive free cash flow, and that puts the company in a position to reinvest, but we wouldn't mind seeing cashflow yield improve a little.

Over the last 5 years Allegro MicroSystems has averaged a 16.6% return on invested capital (ROIC), implying it has a very healthy competitive position and a track record of investing in profitable growth.

Key Takeaways from Allegro MicroSystems's Q2 Results

With a market capitalization of $4.33 billion Allegro MicroSystems is among smaller companies, but its more than $293.5 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 that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, there was a slight increase in inventory levels. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is up 5.69% on the results and currently trades at $23.95 per share.

Is Now The Time?

When considering Allegro MicroSystems, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although we have other favorites, we understand the arguments that Allegro MicroSystems is not a bad business. However, its revenue growth has been weak. But on a positive note, its high return on invested capital suggests it can grow very profitably and has been well managed.

Allegro MicroSystems's price to earnings ratio based on the next twelve months is 20.3x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Allegro MicroSystems doesn't trade at a completely unreasonable price point.

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