2023-03-18 07:30:27 ET
Summary
- Allegro MicroSystems held its first-ever analyst day on Tuesday.
- Allegro’s management said the company expects to continue seeing robust growth in its automotive and clean energy markets.
- ALGM is a good Buy candidate despite the string run-up in the year-to-date.
Automotive chipmaker Allegro MicroSystems Inc. (ALGM) held its first first-ever analyst day on Tuesday that earned it several Wall Street price-target hikes. Allegro is a global leader in sensing and Power IC solutions. But first, a short interlude. I first became interested in this mid-cap company after it emerged near the top of my semiconductor stock screener in terms of performance. ALGM is the second-largest holding in the SPDR S&P Semiconductor ETF (XSD) after Nvidia Corp. (NVDA), though they hold nearly equal weight since XSD is an equally weighted ETF with 40 holdings. Incidentally, the two stocks boast the best year-to-date returns among XSD stocks, with NVDA having returned 78.4% while ALGM has gained 57.0%.
Back to the business of the day. At the event, Allegro's management said the company expects to continue seeing robust growth in its automotive and clean energy markets. Automotive chip sales is the company's largest segment, accounting for 69% of the company's total revenue. Allegro's growth continues to be driven by ongoing momentum in its e-mobility, including xEV and ADAS (Advanced Driver-Assistance Systems), as well as industrial markets with sales in these strategic focus areas, increasing 11% sequentially and 56% year-over-year in Q4 2022. Electric vehicle xEV is the generic name for electromotive vehicles such as plug-in hybrid electric vehicles, hybrid electric vehicles and fuel-cell electric vehicles. The company is targeting 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. For some perspective, Allegro MicroSystems' net sales for nine months ended December 2022 was $704,208 for an annual run-rate of ~$940,000.
I think that's a fairly conservative estimate considering that net sales increased 24.0% last year and 33.3% in Q4 2022. Sales in the company's automotive business increased 8% sequentially to a quarterly record and accounted for 80% Y/Y growth. 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. Last quarter, e-Mobility applications expanded to a record 43% of the company's automotive sales. In addition, the majority of third quarter automotive design wins were in e-Mobility with notable design wins including multiple wins with a Chinese EV manufacturer as well as a large ADAS application for Allegro's power products in a steering system for a North American OEM.
Further, 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 already here, with global ICE vehicle demand decreasing by nearly 10 million by 2026 and 22 million vehicles over the next 4 years.
Allegro MicroSystems Revenue Growth
Price Target Hikes
No less than four Wall Street firms have hiked their price targets on ALGM stock after the company's presentation. TD Cowen analyst Joshua Buchalter has reiterated his outperform rating on ALGM stock and hiked his PT to $52 from $44, saying, "Despite the stock's run, we see no signs of Allegro's momentum slowing. The key theme throughout the presentation was Allegro's robust growth driven by both content and socket expansion as several verticals electrify and automate. That includes electric vehicles, advanced driver-assistance systems, charging infrastructure, clean energy, robotics and data centers.''
Allegro MicroSystems has a consensus rating of Strong Buy based on 5 buy ratings, 0 hold ratings and 0 sell ratings. The average price target is $51.00 with a high forecast of $54.00 and a low forecast of $48.00, suggesting ~10% upside. Interestingly, ALGM is rated a Strong Buy by SA Quant, a good sign considering that since its inception (December 2009 onwards), ' Strong Buy' stock picks have delivered a staggering return .
With an RSI reading of 63, ALGM shares are approaching overbought territory. However, Allegro MicroSystems appears to be on a strong run and barring negative events like a bad earnings miss is unlikely to pull back significantly (>10%) to create a more favorable entry point. I rate this stock a good Buy candidate for long-term investors.
For further details see:
Allegro MicroSystems Impresses On First Ever Analyst Day