Allegro MicroSystems has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 17.4% to $25.84 per share while the index has gained 21.1%.
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Why Is Allegro MicroSystems Not Exciting?
We don't have much confidence in Allegro MicroSystems. Here are three reasons why ALGM doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Allegro MicroSystems grew its sales at a mediocre 4.4% compounded annual growth rate. This fell short of our benchmark for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Allegro MicroSystems, its EPS declined by 17.2% annually over the last five years while its revenue grew by 4.4%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Allegro MicroSystems has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 7.6%, lousy for a semiconductor business.
Final Judgment
Allegro MicroSystems isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 40.4× forward P/E (or $25.84 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at a top digital advertising platform riding the creator economy.
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