On Thursday, Morgan Stanley (NYSE:MS) initiated coverage on Allegro (WA:ALEP) MicroSystems (NASDAQ:ALGM), a fabless manufacturer specializing in magnetic sensing and power integrated circuits (ICs), with an Equal-weight rating and a price target of $21.00.
The firm's analysis suggests a cautious outlook for the automotive semiconductor market, which is projected to experience a period of stagnation. This anticipated slowdown in both battery electric vehicles (BEV) and internal combustion engine (ICE (NYSE:ICE)) content growth is expected to be a significant challenge for Allegro's revenue expansion.
The Equal-weight rating reflects Morgan Stanley's neutral stance on Allegro's stock, considering the potential headwinds facing the company. Allegro, with around 75% of its business tied to the automotive sector, may find its growth prospects limited by the forecasted market conditions.
The automotive semiconductor industry is bracing for a phase where increases in semiconductor content per vehicle could taper off, affecting companies like Allegro that are heavily reliant on this market segment.
Morgan Stanley's price target of $21.00 for Allegro is based on a multiple of 30 times the company's projected calendar year 2026 earnings per share (EPS). This valuation is consistent with Allegro's average multiple since 2022.
The target represents a premium compared to peers in the automotive semiconductor space, such as ON Semiconductor (NASDAQ:ON) and Infineon (OTC:IFNNY), but aligns with companies that boast higher gross margins in the analog/microcontroller unit (MCU) sector, including Analog Devices (NASDAQ:ADI), Texas Instruments (NASDAQ:TXN), and Microchip Technology (NASDAQ:MCHP).
Allegro's positioning in the market, according to Morgan Stanley, is at a crossroads where its valuation mirrors companies with stronger financial metrics, despite the anticipated challenges in its core automotive segment. The Equal-weight rating suggests that Allegro's current market price may adequately reflect the company's prospects and industry conditions.
The assessment by Morgan Stanley underscores the broader industry trend where semiconductor manufacturers with significant exposure to the automotive sector must navigate a potentially slower growth landscape. Allegro's future performance will likely hinge on how well it can adapt to these changing market dynamics and maintain its competitive edge amidst a shifting automotive semiconductor market.
In other recent news, Allegro MicroSystems has disclosed mixed financial results for the second quarter of fiscal year 2025. The semiconductor company reported Q2 sales of $187 million, marking a 12% increase from the previous quarter but a 32% decrease year-over-year. Non-GAAP earnings per share (EPS) were at the high end of the company's guidance at $0.08.
Amid these results, Allegro emphasized its growth in the electric vehicle (EV) sector and the launch of two new XtremeSense TMR current sensors as key drivers.
In the face of challenging market conditions, Allegro achieved significant design wins across the automotive and medical sectors, with a noted strong demand from Chinese automotive OEMs. The company's CFO reported a gross margin of 48.8% and an operating margin of 11.7%. Looking forward, Q3 sales are projected to range between $170 million and $180 million, with a gross margin of 49%-51%.
In a move towards financial stability, Allegro made a voluntary debt payment, reducing the term loan balance to $375 million. While the company recorded a $35 million non-cash GAAP loss in Q2, it remains focused on inventory rebalancing and supply chain improvements, particularly in China.
As part of recent developments, Allegro is expected to attend several conferences in December to discuss its technology and market position.
InvestingPro Insights
Recent data from InvestingPro provides additional context to Morgan Stanley's analysis of Allegro MicroSystems (NASDAQ:ALGM). The company's market capitalization stands at $4.05 billion, reflecting its significant presence in the semiconductor industry. However, Allegro's financial metrics reveal some challenges that align with Morgan Stanley's cautious outlook.
InvestingPro data shows that Allegro's revenue growth has been negative, with a decline of 20.72% over the last twelve months. This trend supports Morgan Stanley's concerns about the company's growth prospects in a slowing automotive semiconductor market. Additionally, the company's P/E ratio of -168.4 indicates that Allegro is currently not profitable, which could be a factor in the Equal-weight rating assigned by Morgan Stanley.
InvestingPro Tips highlight that Allegro operates with a moderate level of debt and has liquid assets exceeding short-term obligations, which may provide some financial flexibility as it navigates market challenges. However, the stock has taken a significant hit over the last six months, with a price total return of -27.34%, reflecting investor concerns about the company's near-term prospects.
It's worth noting that despite current headwinds, analysts predict Allegro will be profitable this year, according to another InvestingPro Tip. This projection could be factored into Morgan Stanley's price target calculation, which is based on future earnings estimates.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips for Allegro MicroSystems, providing a deeper understanding of the company's financial health and market position.
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