Shares of chip designer Allegro MicroSystems (NASDAQ:ALGM) jumped 11.1% in the morning session after the company reported third-quarter results with EPS exceeding expectations. Its inventory levels shrunk, and free cash flow improved significantly. On the other hand, its revenue and EPS guidance for the 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, it was a mixed quarter for the company.
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What is the market telling us:
Allegro MicroSystems's shares are quite volatile and over the last year have had 11 moves greater than 5%. But moves this big are very rare even for Allegro MicroSystems and that is indicating to us that this news had a significant impact on the market's perception of the business.
The previous big move we wrote about was 28 days ago, when the company dropped 9.8% on the news that auto-related semiconductor stocks experienced a decline after auto-chip maker Mobileye provided preliminary estimated financial results for Q4'2023 and FY 2024, which fell below Wall Street's expectations. Mobileye cut its Q4'2023 revenue guidance to a range of $634 million to $638 million, falling below both its initial forecast ($623 million to $648 million) and analysts' consensus estimates. Looking ahead, the company provided FY'2024 revenue guidance of $1,830 million to $1,960 million, below market expectations. For the first quarter of FY'2024, it expects revenue to drop about 50% from a year earlier. The weak outlook was attributed to "excess inventory" built up by Mobileye's Tier 1 customers. Management elaborated, stating, "Based on our discussions, we understand that much of this excess inventory reflects decisions by Tier 1 customers to build inventory in the Basic ADAS category due to supply chain constraints in 2021 and 2022 and a desire to avoid part shortages, as well as lower than-expected production at certain OEM's during 2023."
Moving on, Mobileye expects this excess inventory to be largely consumed in Q1 2024, leading to lower volume in its EyeQ® SoC business and a temporary hit to profitability. Overall, the weak outlook signals potential challenges for semiconductor stocks in the near term.
Allegro MicroSystems is down 4.6% since the beginning of the year, and at $28.15 per share it is trading 46.6% below its 52-week high of $52.72 from July 2023. Investors who bought $1,000 worth of Allegro MicroSystems's shares at the IPO in October 2020 would now be looking at an investment worth $1,590.
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