Allegro MicroSystems (ALGM)

Chip designer Allegro MicroSystems (NASDAQ:ALGM) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 14.4% year on year to $214.3 million. On top of that, next quarter’s revenue guidance ($220 million at the midpoint) was surprisingly good and 3.3% above what analysts were expecting. Its GAAP profit of $0.03 per share was $0.02 below analysts’ consensus estimates.

Company Overview

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.

A company’s top-line performance can indicate its business quality. Rapid growth can signal it’s benefiting from an innovative new product or burgeoning market trend. Allegro MicroSystems’s demand was weak over the last two years as its sales fell by 14.2% annually, a tough starting point for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. Allegro MicroSystems’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 14.2% annually.

This quarter, Allegro MicroSystems reported year-on-year revenue growth of 14.4%, and its $214.3 million of revenue exceeded Wall Street’s estimates by 1.4%. Company management is currently guiding for a 23.7% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 18% over the next 12 months, an improvement versus the last two years. This projection is commendable and indicates its newer products and services will catalyze better top-line performance.

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 135, 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 margin is slightly below the average semiconductor company, indicating its products aren’t as mission-critical as its competitors. As you can see below, it averaged a 47% gross margin over the last two years. That means Allegro MicroSystems paid its suppliers a lot of money ($52.96 for every $100 in revenue) to run its business.

Allegro MicroSystems’s gross profit margin came in at 46.3% this quarter, in line with the same quarter last year. Zooming out, Allegro MicroSystems’s full-year margin has been trending down over the past 12 months, decreasing by 4.3 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Allegro MicroSystems was profitable over the last two years but held back by its large cost base. Its average operating margin of 2.2% was weak for a semiconductor business. This result isn’t too surprising given its low gross margin as a starting point.

Analyzing the trend in its profitability, Allegro MicroSystems’s operating margin decreased by 10.4 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Allegro MicroSystems’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q3, Allegro MicroSystems generated an operating margin profit margin of 2.9%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Allegro MicroSystems, its EPS declined by 15.6% annually over the last five years while its revenue grew by 6.1%. This tells us the company became less profitable on a per-share basis as it expanded.

Diving into the nuances of Allegro MicroSystems’s earnings can give us a better understanding of its performance. As we mentioned earlier, Allegro MicroSystems’s operating margin was flat this quarter but declined by 10.4 percentage points over the last five years. Its share count also grew by 1,763%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

In Q3, Allegro MicroSystems reported EPS of $0.03, up from negative $0.18 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Allegro MicroSystems’s full-year EPS of negative $0.16 will flip to positive $0.43.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Allegro MicroSystems has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 7.8%, lousy for a semiconductor business.

Taking a step back, we can see that Allegro MicroSystems’s margin dropped by 7.2 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s in the middle of a big investment cycle.

Allegro MicroSystems’s free cash flow clocked in at $13.92 million in Q3, equivalent to a 6.5% margin. This result was good as its margin was 3.5 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Allegro MicroSystems historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 14%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+.

Allegro MicroSystems reported $117.5 million of cash and $287.7 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $133 million of EBITDA over the last 12 months, we view Allegro MicroSystems’s 1.3× net-debt-to-EBITDA ratio as safe. We also see its $11.19 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Allegro MicroSystems’s revenue guidance for next quarter beat analysts’ expectations. We were also glad its inventory levels shrunk. On the other hand, its EPS was in line and its adjusted operating income fell slightly short of Wall Street’s estimates. Overall, this was a mixed quarter. The stock traded up 6.6% to $32.80 immediately after reporting.

Updated: December 4, 2025 at 9:25 PM EST

When considering an investment in Allegro MicroSystems, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Allegro MicroSystems’s business quality ultimately falls short of our standards. Although its revenue growth was mediocre over the last five years and is expected to accelerate over the next 12 months, its declining EPS over the last five years makes it a less attractive asset to the public markets. And while the company’s projected EPS for the next year implies the company’s fundamentals will improve, the downside is its low free cash flow margins give it little breathing room.

Allegro MicroSystems’s P/E ratio based on the next 12 months is 38.3x. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $38.58 on the company (compared to the current share price of $28.79).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.