Allegro MicroSystems (NASDAQ:ALGM) Reports Weak Q3

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.

Is now the time to buy Allegro MicroSystems? Find out in our full research report.

“We delivered third-quarter net sales of $255 million, up 2% year-over-year, driven by continued strength in Automotive, which grew 18% year-over-year. Non-GAAP EPS was $0.32, 10% above the midpoint of guidance on in-line sales, and free cash flow increased $27 million, or more than 170% sequentially,” said Vineet Nargolwala, President and CEO of Allegro.

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.

Processors and Graphics Chips

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 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.

Today’s young investors won’t have read the timeless lessons in Gorilla Game: Picking Winners In High Technology because it was written more than 20 years ago when Microsoft and Apple were first establishing their supremacy. But if we apply the same principles, then enterprise software stocks leveraging their own generative AI capabilities may well be the Gorillas of the future. So, in that spirit, we are excited to present our Special Free Report on a profitable, fast-growing enterprise software stock that is already riding the automation wave and looking to catch the generative AI next.

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.

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.

Allegro MicroSystems may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 50% year on year and best-in-class SaaS metrics it should definitely be on your radar.