Allegro MicroSystems (ALGM 5.59%) has been around since the 1990s, but it didn't have its IPO until 2020. Why care about this analog chip designer now?
Well, it's quickly growing (shares are up nearly 162% since the IPO) thanks to its end markets enabling automotive technology, renewable energy, and industrial automation.
Allegro MicroSystems just hosted its first-ever investor day as a public company, and the market was pleased with the updates. If you believe the future of autos is battery power, Allegro is worth getting familiar with.
An emerging technologist you've never heard of
Allegro is a fabless semiconductor company -- meaning it designs chips and subcontracts their manufacturing to partners. This allows for a lean operation that removes some of the extra burden of maintaining its own chipmaking factories.
Chip wafer manufacturing is handled primarily by Polar Semiconductor, which is majority controlled by Japan's Sanken Electric. Sanken Electric created Allegro in 1990 and still owns the majority of Allegro shares (over 51%).
Although this ownership structure muddies the waters a bit, Allegro is beginning to show signs of a thriving growth business all on its own. While it sells over 1,000 different parts and components, it has been fetching higher average-dollar sales as automotive and renewable energy demand has risen. Allegro's product portfolio is centered around power, speed, and position sensors, as well as electric motor drivers and regulators.
In its latest quarter (the three months ended in December 2022), automotive was the top end market, at 68% of sales. Its smaller industrial market, which serves key applications in renewable energy projects and industrial automation and robotics, made up much of the balance but grew at a 60% year-over-year clip.
In total, the company hauled in $249 million in sales, a 33% year-over-year increase, in the last quarter. Generally accepted accounting principles (GAAP) net income doubled from a year ago to $64.5 million, and free cash flow has been quickly rising too. The company ended 2022 with $334 million in cash and short-term investments and minimal debt (owed to its controlling shareholder and related parties).
Data by YCharts.
A key acquisition in an emerging growth market
It's also important to point out that Allegro acquired a small start-up chip designer called Heyday Integrated Circuits in late 2022. Heyday designs chips that convert high voltages from gallium nitride- (GaN) and silicon carbide- (SiC) based systems. This puts Allegro adjacent to such companies as Wolfspeed, ON Semi, and others that are betting on continuous adoption of SiC and other high-voltage systems as electric vehicle and renewable energy projects pick up steam.
Indeed, during its investor day, Allegro said it expects a doubling in its serviceable markets for electric vehicles over the next five years or so. Granted, a serviceable market doesn't directly equate to revenue expectations. Nevertheless, the company believes it can sustain rapid double-digit growth thanks to its focus on e-mobility -- the electrification of vehicles, and the world's energy grid.
A top play on automotive tech
With annual sales still just shy of $1 billion, Allegro could still be very early on its growth journey. Although it specializes in a different type of chips, this company appears to share some similarities with Indie Semiconductor, which is even earlier in its growth story, as it designs sensors and power chips for modern cars. (Allegro's designs are involved with the actual powertrain of a vehicle, though).
For now, Indie is the faster-growing business, but it's still quite far away from being robustly profitable. Allegro, on the other hand, is profitable by all metrics and has a clean balance sheet. Although both companies fetch a high premium right now, Allegro is interesting to me at this juncture, given its impressive profitable scale-up.
Data by YCharts.
I just sold some of my small stake in Indie Semiconductor, and I might put that small sum to work in Allegro now. Given the present hype surrounding Allegro after its investor day, I'm staying cautious for now.
Nevertheless, if smaller semiconductor stocks addressing the emerging automotive tech industry are what you're after, keep Allegro on your watch list.
