No Surprises In Allegro MicroSystems's (NASDAQ:ALGM) Q2 Sales Numbers But Quarterly Guidance Underwhelms

Chip designer Allegro MicroSystems (NASDAQ:ALGM) reported results in line with analysts' expectations in Q2 FY2024, with revenue up 15.9% year on year to $275.5 million. However, next quarter's revenue guidance of $255 million was less impressive, coming in 5.18% below analysts' estimates. Turning to EPS, Allegro MicroSystems made a GAAP profit of $0.34 per share, improving from its profit of $0.26 per share in the same quarter last year.

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“We delivered second quarter net sales of $276 million dollars, up 16% year-over-year, driven by continued strength in Automotive, which grew 31% year-over-year. We also achieved record non-GAAP Diluted Earnings per Share of $0.40, an increase of 29% year-over-year,” said Vineet Nargolwala, President and CEO of Allegro MicroSystems.

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.

Processors and Graphics Chips

The biggest demand drivers for processors (CPUs) and graphics chips at the moment are secular trends related to 5G and Internet of Things, autonomous driving, and high performance computing in the data center space, specifically around AI and machine learning. Like all semiconductor companies, digital chip makers exhibit a degree of cyclicality, driven by supply and demand imbalances and exposure to PC and Smartphone product cycles.

Sales Growth

Allegro MicroSystems's revenue growth over the last three years has been strong, averaging 23.9% annually. As you can see below, this quarter was especially strong, with revenue growing from $237.7 million in the same quarter last year to $275.5 million. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Allegro MicroSystems had a decent quarter as its revenue grew 15.9% year on year, in line with analysts' estimates. This marks 12 straight quarters of growth, showing that the current upcycle has had a good run, as a typical upcycle usually lasts 8-10 quarters.

Allegro MicroSystems's management team believes its revenue growth will continue, guiding to 2.5% year-on-year growth next quarter. This compares to Wall Street's estimates of 4.58% growth over the next 12 months.

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Product Demand & Outstanding Inventory

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 136, which is 29 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.

Key Takeaways from Allegro MicroSystems's Q2 Results

Sporting a market capitalization of $4.96 billion, Allegro MicroSystems is among smaller companies, but its more than $378.4 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

We were impressed by how significantly Allegro MicroSystems blew past analysts' EPS expectations this quarter, driven by better-than-expected performance in its core automotive division. We were also glad its operating margin improved. On the other hand, its revenue guidance for next quarter underwhelmed and its inventory levels slightly increased. We note that many semiconductor companies have given weak outlooks for the next quarter. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The market was likely expecting more, however, and the stock is down 4.04% after reporting, trading at $24.72 per share.

So should you invest in Allegro MicroSystems right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.