Why Allegro MicroSystems (ALGM) Stock Is Falling Today

Jabin Bastian /
2024/01/04 2:57 pm EST

What Happened:

Shares of chip designer Allegro MicroSystems (NASDAQ:ALGM) fell 9.8% in the morning session after 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.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Allegro MicroSystems? Access our full analysis report here, it's free.

What is the market telling us:

Allegro MicroSystems's shares are quite volatile and over the last year have had 12 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The biggest move we wrote about over the last year was 8 months ago, when the stock gained 5.9% on the news that the company reported fourth-quarter revenue, gross margin, operating income, and earnings per share (EPS) ahead of analysts' estimates. As minor negatives, free cash flow missed, and inventory levels rose. However, revenue and EPS guidance for the next quarter came in ahead of expectations. The company highlighted some of the projected gains discussed during the recent analyst day presentation as it continued to deliver technology to companies in the growing electric vehicles and automation markets. Management added that "E-Mobility increased to 43% of fiscal year 2023 Automotive sales, up from 36% in fiscal year 2022." The combination of the quarter's outperformance, the guidance above expectations, and bullish management commentary made for a very good quarter.

At $27.03 per share Allegro MicroSystems is trading 48.7% 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 $1,527.

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