Allegro MicroSystems Stock: Semiconductor Play Down 41% in 2022; Time to Consider It?

Allegro MicroSystems Inc Develops Microchips for Next-Gen Applications

Semiconductor stocks have been battered this year. The SPDR S&P Semiconductor ETF (NYSE:XSD) has been extremely volatile in 2022, declining by 44% from $250.82 in January to $139.08 on October 13.

I view microchip stocks’ recent price weakness as a long-term opportunity.

In the U.S., the signing of the CHIPS and Science Act, which is meant to improve the competitiveness of the domestic technology industry, will help. While it will take time to see results from the legislation and its related government spending, the outlook for semiconductor-related stocks is bright.

Chart courtesy of StockCharts.com

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One compelling microchip stock is Allegro MicroSystems Inc (NASDAQ:ALGM). The company develops and designs sensor integrated circuits and application-specific analog power integrated circuits for new technologies, including applications for the automotive and industrial sectors.

The company operates solely as a fabless chipmaker. Its solutions include products for electric vehicles, advanced driver-assistance systems, industrial automation systems, data centers, and green energy systems. (Source: “Innovation With Purpose,” Allegro MicroSystems Inc, last accessed October 21, 2022.)

Allegro MicroSystems has been moving toward the billion-dollar revenue threshold, and it has been generating positive earnings before interest, taxes, depreciation, and amortization (EBITDA); earnings per share (EPS); and free cash flow (FCF).

Despite Allegro MicroSystems Inc’s excellent financial performance, ALGM stock is down by 41% in 2022 and 45% down from its record high of $38.28 in December 2021.

I see Allegro MicroSystems stock’s lower price level as a contrarian opportunity.

Chart courtesy of StockCharts.com

Strong Fundamentals Bode Well for ALGM Stock

Allegro MicroSystems Inc’s revenues were negatively affected by the COVID-19 pandemic in fiscal 2020 and 2021, prior to powering up by 30% to a record $768.7 million in fiscal 2022 (which ended March 22.)

Allegro MicroSystems’ revenue growth is expected to continue at 20.0% to $922.3 million in fiscal 2023, followed by 9.4% to $1.0 billion in fiscal 2024. (Source: “Allegro MicroSystems, Inc (ALGM),” Yahoo! Finance, last accessed October 21, 2022.)

Fiscal YearRevenues (Millions)Growth
2019$724.3N/A
2020$650.1-10.3%
2021$591.2-9.1%
2022$768.730.0%

(Source: “Allegro MicroSystems Inc,” MarketWatch, last accessed October 21, 2022.)

Allegro MicroSystems Inc has also produced EBITDA income in its last four fiscal years.

Fiscal YearEBITDA (Millions)Growth
2019$166.0N/A
2020$129.7-21.9%
2021$94.5-27.3%
2022$188.9100.2%

(Source: Ibid.)

On the bottom line, Allegro MicroSystems Inc grew its generally accepted accounting principles (GAAP) diluted EPS to a record $0.62 in fiscal 2022.

On an adjusted basis, the company reported profits of $0.78 per diluted share fiscal 2022. That’s expected to rise to $1.07 per diluted share in fiscal 2023 and $1.19 per diluted share in fiscal 2024. (Source: Yahoo! Finance, op. cit.)

Fiscal YearGAAP Diluted EPSGrowth
2019$0.45N/A
2020$0.20-56.4%
2021$0.09-51.5%
2022$0.62557.3%

(Source: MarketWatch, op. cit.)

Allegro MicroSystems Inc has also been churning out positive FCF. The company’s FCF has risen in each of the last three fiscal years, to a record $86.2 million in fiscal 2022.

Fiscal YearFCF (Millions)Growth
2019$22.8N/A
2020$35.857.1%
2021$79.9123.2%
2022$86.27.9%

(Source: MarketWatch, op. cit.)

Moreover, Allegro MicroSystems Inc maintains a solid balance sheet, which includes good working capital, $40.6 million of debt, and $286.6 million in cash. (Source: Yahoo! Finance, op. cit.)

Analyst Take

Allegro MicroSystems Inc is supported by bullish economic tailwinds, and the company has been delivering strong financial growth and fundamentals.

Allegro MicroSystems stock’s price deterioration presents an attractive risk/reward opportunity for investors.