Allegro MicroSystems, Inc. (ALGM) in Manchester, N.H., designs, manufactures, and markets sensor integrated circuits (ICs) and application-specific analog power ICs for motion control and energy-efficient systems. The company has been named to Inc.'s first annual Best-Led Companies list—a select, data-driven list of the most potent U.S. firms with $50 million - $2 billion in revenue. ALGM’s shares have gained 37.1% in price over the past year and 33.8% year-to-date to close its last trading session at $35.68. The stock is currently trading above its 50-day and 200-day moving averages. Furthermore, ALGM's past year and year-to-date gains of 28.4% and 27.4%, respectively, have outperformed the broader S&P 500’s gains. Wall Street analysts' $40.20 median price target indicates a potential 12.7% upside from its last closing price. And each of the Wall Street analysts that rated the stock has rated it buy.

The chipmaker posted its latest quarterly report in October, beating the consensus estimates in its top and bottom lines. The company's total net sales were $193.61 million, versus analysts' expectations of $188.04 million. Its EPS came in at $0.20, topping the consensus estimate by 11.1%. For the third quarter, ALGM expects its total net sales to be in the range of $180 million - $185 million. The anticipated sequential decline is due to the impact of COVID-related third-party factory shutdowns in Malaysia.

However, continued strong demand and record levels of backlog are expected to help the company grow. Furthermore, with the improving supply-chain situation and factories getting back online, the company is confident in revenue growth of about 28% in its current fiscal. Also, Ravi Vig, President and CEO of ALGM, said, "Based on strong end-market positioning, business fundamentals, and design win momentum, we believe we are well-positioned to deliver low- to mid-teens revenue growth and strong gross margins for fiscal 2023."

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Here is what could shape ALGM's performance in the near term:

Profitable

ALGM's EBITDA 25.12% margin is 74.2% higher than the 14.42% industry average Also, its 18.75% levered FCF margin is 60% higher than the 11.72% industry average.

ALGM's 9.99%, 8.02%, and 12.12% respective ROE, ROA, and ROTC are 20.5%, 121.7%, and 142.8% higher than the industry averages.

Favorable Analysts' Expectation

Analysts expect ALGM's revenues to increase 27.9% in the current year and 13.4% in the next year. And the company's EPS is expected to grow 38.5% in the current quarter, 65.2% in the current year, and 26.3% in the next year. The company's EPS is expected to grow 13% per annum over the next five years.

Solid Latest Quarterly Report

ALGM's gross profit increased 66% year-over-year to $102.53 million in its fiscal second quarter, ended September 24. Its operating income increased 210.9% from the same period last year to $38.55 million. Its non-GAAP net income came in at $38.67 million, indicating an increase of 9.8% year-over-year, while its adjusted EBITDA increased 9.6% year-over-year to $58.96 million.

POWR Ratings Reflect Growth Prospects

ALGM has an overall B rating, translating to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a B grade for Quality, which is consistent with its higher-than-industry profit margins.

ALGM has an A grade for Sentiment. Favorable analysts' sentiments about the stock justify this grade.

Of the 99 stocks in the Semiconductor & Wireless Chip industry, ALGM is ranked #15.

Beyond what I have stated above, one can also view ALGM's grades for Growth, Value, Momentum, and Stability here.

View the top-rated stocks in the A-rated Semiconductor & Wireless Chip industry here.

Bottom Line

ALGM shares have gained significant momentum over the past year. With rising silicon chip demand worldwide, ALGM's prospects look bright. Furthermore, the worldwide chip shortage amid the rising demand is driving up prices and bodes well for ALGM. Also, the company seems well-positioned to capitalize on the industry tailwinds, given its sound financials and stable profit margins. And considering favorable analysts' expectations, we think ALGM could be an ideal addition to one’s watchlist.

How Does Allegro MicroSystems, Inc. (ALGM) Stack Up Against its Peers?

ALGM has an overall POWR Rating of B. However, one could also check out these other stocks within the Semiconductor & Wireless Chip industry with an A (Strong Buy) rating: inTest Corporation (INTT), Semtech Corporation (SMTC), and Broadcom Inc. (AVGO).

Note that AVGO is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here.

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ALGM shares were trading at $35.45 per share on Wednesday morning, down $0.23 (-0.64%). Year-to-date, ALGM has gained 32.97%, versus a 29.45% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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