2023-05-24 11:36:41 ET
Summary
- Automotive chip company Allegro MicroSystems has reported FQ4 and Full-Year 2023 results.
- The company's key growth segments of e-Mobility and Clean Energy & Automation are growing at a faster-than-expected rate while profit margins have been improving across the board.
- ALGM stock is expensive; however, the shares are likely to continue attracting a healthy premium in my view and now might be a good time to buy.
Back in March, I wrote a bullish piece on automotive chip company Allegro MicroSystems, Inc . (ALGM). Allegro is one of the newer semiconductor stocks with the company having listed in October 2020, so it only appeared on my radar quite recently thanks in large part to its share price outperformance. Indeed, ALGM has returned 181% since its IPO date, much better than the 45.6% gain by the SPDR S&P Semiconductor ETF (XSD); and the 43.3% return by the iShares Semiconductor ETF ( SOXX ) or 26.9% gain by the S&P 500 over the timeframe. Allegro MicroSystems makes magnetic sensing and power management chips.
In my piece, I focused on Allegro’s first ever investor day presentation, specifically on its key growth segments: e-Mobility and Clean Energy & Automation. In its March presentation, Allegro told investors that it’s targeting 25% CAGR for its eMobility (xEV & ADAS) segment in the FY23-FY28 period and 18% CAGR for its Clean Energy & Automation segment over the same period. The company said it estimates xEV & ADAS to be a $3.9B SAM (serviceable available market) and Clean Energy & Automation to be a $3.5B SAM (FY 23 revenue clocked in at $973.7M). I argued in my thesis that those growth projections are actually pretty conservative and Allegro is likely to not only meet but exceed them for the simple reason that these megatrends currently are at an optimal phase of their growth cycle (see Gartner’s Hype Cycle here ).
Well, Allegro reported fourth quarter and full-year results two weeks ago, and we got a glimpse into how these segments are performing so far. But first, let’s look at overall results. FQ4 revenue clocked in at $269.4M, good for a healthy 34.5% Y/Y growth and $4.38M above the Wall Street consensus while full-year revenue of $973.7M was a 26.7% Y/Y improvement. Diluted EPS (GAAP) was $0.32, good for a 146% Y/Y growth while full-year EPS was $0.97 representing 56.5% Y/Y growth. Virtually all the other profitability metrics improved: Full-year Gross Margin improved 310 basis points on a GAAP basis to 56.1%; Operating Margin improved 300 basis points to 20.8% while both metrics also improved on a Non-GAAP basis. Allegro is a highly profitable company with all its profitability metrics significantly better than the sector’s for an overall profitability grade of A-. The company’s net margin of 19.24% is particularly high compared to the sector average of 2.36% while net income per employee completely outpaces the sector median at $46,420 vs. $1,636.
That was, by all measures, an impressive quarterly and full-year report.
Allegro also provided upbeat guidance: FQ1 2024 (June 2023 Quarter) revenue is expected to come in the range of $270-$280M, good for a healthy 26.1% YY growth at the midpoint and well above the Wall Street consensus of $256.96M. Allegro’s top line has mostly been exceeding its own estimates or coming at the high end of its guidance range.
And now let’s dive into the company’s growth segments
Industrial sales (where the Clean Energy & Automation subsegment belongs) were $58 million, good for a 15% sequential and 67% year-over-year increase. The company said that it recorded sequential and Y/Y growth in automation and clean energy end markets, but did not divulge actual numbers.
Overall auto sales clocked in at $182 million or 68% of total Q4 sales, an increase of 9% sequentially and 29% year-over-year. Within auto, e-mobility sales increased 17% sequentially and more than 60% year-over-year, much higher than the company’s target growth rate of 25% through FY2028. The pivotal eMobility subsegment now represents 47% of company sales, up from 38% a year ago, and about a third of total sales. That’s a very good trend considering how fast the segment has been growing. It also means the segment can now give a meaningful boost to overall growth.
As I had argued in my earlier piece, Allegro's focus on the secular mega trend of e-Mobility, including the electrification drive and higher adoption of ADAS feature sets, continues to drive the company's growth above average market growth. 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.
Projected EV Growth (Goldman Sachs)
Judging by how fast Allegro’s e-Mobility segment has been growing, I believe it has the potential to reach 50% of corporate sales in about two years. Even better, the segment appears to have healthy margins judging by how Allegro’s margins have been improving across the board. 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.
Over the past few quarters, several chip companies that I track have been facing inventory headwinds that have taken a big hit on their margins. Allegro did talk about delinquent backlog coming down significantly without divulging numbers. The important thing here is that margins have not only remained intact but have continued to improve.
Although ALGM stock has pulled back nearly 19% since peaking in late March, the shares are still expensive with a Price / Sales ('FWD') multiple of 7.02 vs. 2.71 for the sector. However, chip companies with high margins and high growth like Allegro rarely come cheap, as I explained with FPGA maker Lattice Semiconductor ( LSCC ) here . Allegro MicroSystems is relying on powerful megatrends of Electrification, Clean Energy and Automation to drive growth, and these segments have been exceeding expectations. I believe ALGM will exceed its growth targets, meaning this stock has very healthy upside for long-term investors looking to hold for at least three years.
For further details see:
Allegro MicroSystems Delivers Again With Q4 Earnings