2023-08-09 23:10:38 ET
Summary
- Allegro MicroSystems reported strong Q1 earnings, beating expectations, but its shares have since dropped 20%.
- The drop may be due to weak guidance for Q2 and concerns about the company's valuation.
- Allegro's strategic growth drivers, including e-Mobility and select Industrial markets, remain strong, and the company recently announced the acquisition of Crocus Technology.
Last week, automotive chip specialist Allegro MicroSystems, Inc. ( ALGM ) returned its latest quarterly scorecard that exceeded Wall Street's expectations. Allegro reported Q1 FY 24 revenue of $278.29M (+27.8% Y/Y), $5.03M above the consensus while Q1 Non-GAAP EPS of $0.39 beat by $0.02. Diluted EPS (GAAP) of $0.31 was much better than $0.05 posted for last year’s corresponding quarter while gross margin (GAAP) of 56.8% was good for a 240 bps Y/Y improvement.
Interestingly, ALGM shares have slipped 20% since that healthy report came out, raising suspicions of rampant profit-taking. After all, ALGM has returned nearly 50% in the year-to-date and 70% over the past 12 months even after the correction.
There are several plausible reasons why ALGM shares have sold off heavily. The first one is the relatively weak guidance the company offered for the Q2 FY 24. The company expects sales in the second quarter to be in the range of $270 million to $280 million, good for 16% Y/Y growth at the mid-point. Ok, 16% revenue growth is decent enough for many tech companies in this automotive chip business. However, Allegro has maintained top-line growth in excess of 20% over the past four consecutive quarters, with growth last falling to the mid-teens in 2021/2022 due to pandemic-related disruptions, hence the disappointment. The slowdown is likely related to the China market where sales declined 7%Y/Y last quarter due to changes to more stringent emission standards which left the company with excess inventories; China's renewal of new energy vehicle tax incentives and OEM price reductions. The company explained the Chinese market is likely to remain choppy and unpredictable in the short-term, but said it remains very optimistic about the mid- to long-term bullish thesis around China and China OEMs.
The selloff could also be related to valuation concerns since ALGM is not cheap by any means. Indeed, ALGM sports a PE ratio of 44.46x, well above the industry average at 18.23x. With a beta value of 1.6, ALGM is significantly more volatile than the industry average and can swing rather wildly either way. For instance, on July 13, ALGM jumped nearly 10% on no company specific news, with 3.9 million shares changing hands, more than double the daily average of 1.56 million.
But other than the China weakness, there’s a lot to like about Allegro. First off, the company’s revenue stream is really well balanced with no single end customer representing more than 10% of Q1. Geographical sales distribution is also impressive: 22% of sales in both China and the rest of Asia; 21% in the Americas, 20% in Europe and 15% in Japan. That minimizes the chances of any major surprises due to an underperforming customer or geographical segment.
Meanwhile, the rest of the company’s guidance was sound: gross margins expected to be between 56% and 57%; operating expenses to be between 26% and 27% of sales and non-GAAP earnings per share to be in the range of $0.35 to $0.39 per share, good for 54.2%Y/Y growth at the mid-point.
Strategic Growth Drivers Impress
What I find even more intriguing about the big correction is that Allegro’s ‘Strategic Growth Areas’ were really impressive during the quarter, and have been for some time now. e-Mobility and select Industrial markets, including Clean Energy and Automation, are the company’s key growth drivers. Sales in this segment jumped 63% year-over-year to $159 million or 57% of total sales, up from 45% in Q1 of 2023. In other words, more than half of the company’s revenue now comes from its fastest growing segment, which is why I argued in my previous article that Allegro will likely exceed its revenue growth target of 25% CAGR in its xEV & ADAS segment in the FY23-FY28 period and 18% CAGR in its Clean Energy and Automation segment over the same period. The company estimates xEV & ADAS to be a $3.9B SAM and Clean Energy & Automation to be a $3.5B SAM.
Here is an excerpt from the transcript detailing the performance of these segments:
E-Mobility, which includes the increasing electrification of vehicles and higher adoption of ADAS feature sets, continues to drive Allegro's above-market growth. Total Q1 automotive revenue grew 27% year-over-year, outpacing auto production growth of approximately 6% over the same period. Sales into e-Mobility applications increased by 58% year-over-year and represented 48% of our Q1 automotive sales, up from 39% in Q1 of 2023.Our solutions-based design approach continues to be well received by our customers. Nearly 60% of first quarter automotive design wins were in e-Mobility. A recent example during the quarter was a multi-portfolio chipset ADAS design win with a leading North American OEM further validating our strong value proposition. Our design win momentum and the significant content opportunity associated with those design wins, continues to drive our above-market performance in automotive. Moving on to the Industrial market. Growth in Clean Energy and Automation drove 70% year-over-year sales increase in Q1, resulting in record Industrial sales. First quarter Industrial design wins leverage our sensor technology for DC charging, residential solar inverter and energy storage applications, where we see expanding opportunities for our solutions. We continue to align our investments in R&D and customer support capabilities to focus on high-growth secular megatrends in Automotive and Industrial markets that intersect with our technical expertise and market-leading sensor and power product portfolios. I'm excited about the launch this quarter of the first device in our new Power-Thru portfolio that leverages technology from our acquisition of Heyday Integrated Circuits last October. In addition to validating our ongoing commitment to innovation and execution, this launch serves as a proof point for the rapid pace at which our team can integrate new technologies into commercially viable and market-ready products.’'
As I explained in my previous ALGM piece, the majority of experts expect the shift to EVs to accelerate sharply in the coming years, with Goldman Sachs projecting that EV sales will hit 73 million units in 2040, up from ~2 million in 2020. GS says that the percentage of EVs in worldwide car sales will rise to 61% from 2% during that span with the share of EV sales anticipated to exceed 80% in many developed countries. Goldman has forecast sales of EVs to grow by 32% CAGR in the current decade, even as sales of products related to gasoline engines slump. The analysts have forecast that the global car industry's operating profits will grow to $418 billion in 2030, up from $315 billion in 2020, while the pool of profits for EVs will increase to $110 billion from $1 billion. Meanwhile, the global ICE cliff is likely already here, with global ICE vehicle demand decreasing by nearly 10 million by 2026 and 22 million vehicles over the next 4 years.
Allegro’s strategic growth drivers appear to have healthy margins judging by how its gross margin has been improving. This suggests the company has ample pricing power. Unlike the memory chip industry which is facing a supply glut , automotive chips continue being in short supply with AutoForecast Solutions predicting that automakers will be forced to cut roughly 350,000 vehicles from their plans in the current year due to the shortage.
Crocus Technology Acquisition
On Aug 08th, Allegro MicroSystems announced that it will acquire privately-held Crocus Technology for $420M in an all-cash deal using a combination of cash on hand and new debt issuance. The deal is expected to close in the current year.
Crocus provides advanced Tunnel Magnetoresistance sensor technology solutions to designers and manufacturers of automotive, industrial and consumer electronics. Crocus was spun off from France-based Grenoble in 2006. For the first nine years of its existence, “Crocus sprinted to win the MRAM market race. More than ten companies failed, but Crocus and Everspin survived,” a Crocus spokesperson has told EE Times Europe. The acquisition will give Allegro exposure to an important emerging memory market.
MRAM (magnetoresistive random access memory) is one of several emerging non-volatile memory technologies. The emerging memory market is projected to be a $44 billion market by 2031, and will gradually displace incumbent technologies including DRAM, NOR flash and SRAM either in standalone memory chips or in embedded memories within microcontrollers, ASICs, and even compute processors. MRAM is expected to be among the fastest growing segment, with total MRAM manufacturing equipment revenue projected to grow more than 100x from $10 million in 2020 to $1.1 billion in 2031, while standalone MRAM and STT-RAM revenues are expected to grow to about $1.7 billion, or over forty-two times over the timeframe.
Emerging Memory Technologies (Embedded.com)
Takeaway
I think the ALGM selloff is an overreaction, and is probably related to concerns about the company’s weak China market as well as pricey shares. However, not a single of my bullish theses about this company has changed, and also think its Crocus acquisition is a shrewd one. Long-term investors should use the selloff to build new positions.
For further details see:
Allegro MicroSystems: Big Post-Earnings Pullback Offers Fresh Entry Points