Allegro MicroSystems (ALGM)

Chip designer Allegro MicroSystems (NASDAQ:ALGM) beat Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 19.9% year on year to $192.8 million. Guidance for next quarter’s revenue was optimistic at $197 million at the midpoint, 2.9% above analysts’ estimates. Its non-GAAP profit of $0.06 per share was in line with 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.

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Allegro MicroSystems’s sales grew at a sluggish 2.6% compounded annual growth rate over the last five years. This was below our standards and is a rough 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 13.7% annually.

This quarter, Allegro MicroSystems’s revenue fell by 19.9% year on year to $192.8 million but beat Wall Street’s estimates by 4.3%. Despite the beat, the drop in sales could mean that the current downcycle is deepening. Company management is currently guiding for a 18% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 13.9% over the next 12 months, an improvement versus the last two years. This projection is noteworthy and implies 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 148, which is 28 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.

Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.

Allegro MicroSystems’s unit economics are reasonably high for a semiconductor business, pointing to a lack of meaningful pricing pressure and its products’ solid competitive positioning. As you can see below, it averaged an impressive 50.5% gross margin over the last two years. That means for every $100 in revenue, roughly $50.50 was left to spend on selling, marketing, R&D, and general administrative overhead.

In Q1, Allegro MicroSystems produced a 41.4% gross profit margin, marking a 9.8 percentage point decrease from 51.2% in the same quarter last year. Allegro MicroSystems’s full-year margin has also been trending down over the past 12 months, decreasing by 10.4 percentage points. If this move continues, it could suggest deteriorating pricing power and higher input costs (such as raw materials and manufacturing expenses).

Allegro MicroSystems was profitable over the last two years but held back by its large cost base. Its average operating margin of 9.9% was weak for a semiconductor business. This result is surprising given its high gross margin as a starting point.

Looking at the trend in its profitability, Allegro MicroSystems’s operating margin decreased by 4.8 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.

This quarter, Allegro MicroSystems generated an operating profit margin of negative 6.8%, down 13.5 percentage points year on year. Since Allegro MicroSystems’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Allegro MicroSystems, its EPS declined by 40.4% annually over the last five years while its revenue grew by 2.6%. 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 declined by 4.8 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Allegro MicroSystems reported EPS at $0.06, down from $0.25 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Allegro MicroSystems’s full-year EPS of $0.24 to grow 110%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because 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 4.6%, lousy for a semiconductor business.

Taking a step back, we can see that Allegro MicroSystems’s margin dropped by 10.5 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 becoming a more capital-intensive business.

Allegro MicroSystems’s free cash flow clocked in at $14.96 million in Q1, equivalent to a 7.8% margin. This result was good as its margin was 8.4 percentage points higher than in the same quarter last year, but we wouldn’t read too much into 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? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Allegro MicroSystems’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 17.6%, slightly better than typical semiconductor business.

Allegro MicroSystems reported $121.3 million of cash and $346.1 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 $113 million of EBITDA over the last 12 months, we view Allegro MicroSystems’s 2.0× net-debt-to-EBITDA ratio as safe. We also see its $27.43 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.

We were impressed by Allegro MicroSystems’s strong improvement in inventory levels. We were also excited its EPS outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a solid print. The stock traded up 5.9% to $19.80 immediately following the results.

Updated: May 16, 2025 at 10:21 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Allegro MicroSystems.

We cheer for all companies solving complex technology issues, but in the case of Allegro MicroSystems, we’ll be cheering from the sidelines. To begin with, its revenue growth was weak over the last five years. And while its gross margins indicate it has pricing power, the downside is its declining EPS over the last five years makes it a less attractive asset to the public markets. On top of that, its cash profitability fell over the last five years.

Allegro MicroSystems’s P/E ratio based on the next 12 months is 54.5x. At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $26.82 on the company (compared to the current share price of $27.57), implying they don’t see much short-term potential in Allegro MicroSystems.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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