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The Power and Sensing Chip Maker Wall Street Dumped Before Its Best Quarter
A power and sensing chip maker reports October 29, and the selloff has already priced in a lot of bad news.
One analog chip name has delivered six straight quarters of sales growth, and data center sales are on track to more than double this fiscal year. The stock is down more than 50% from its June high. The next earnings report lands October 29.
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Allegro MicroSystems (NASDAQ: ALGM) has done almost everything right since spring. Sales have grown six quarters in a row, margins are widening, and data center revenue went from a rounding error to a record 17% of sales. You would never guess any of that from the chart.
The stock peaked at an all-time high just above $70 on June 30 and is down more than 50% from there, caught in the broad semiconductor selloff of the past few months.
The business and the share price are telling two very different stories, and the October 29 report is your next chance to see which one is right.
What Just Happened
The last real data point was the fiscal first quarter, reported July 30. Sales came in at $259 million, up 27% year over year and above the top of management's own range.
Non-GAAP EPS was $0.23, more than 2.5 times the year-ago level, and non-GAAP gross margin widened to 51.1%. That is the quarter you should anchor on.
Since then, news flow has focused mostly on the sector, not the company. On October 20, Wells Fargo trimmed its price target to $45 from $56 while keeping an Overweight rating, arguing that analog chip stocks face a tough bar after a run of beats.
RBC initiated coverage with a Buy and a $50 target on October 2, and Morgan Stanley reiterated a bullish call with a $52 target in September. Even the trimmed target sits well above where you can buy the stock.
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What the Business Actually Does
Allegro designs magnetic sensors and power chips that measure and control motion. Think of the chip that tells an electric car's motor exactly where its rotor sits, or the current sensor inside an AI server rack that tracks how much power each board is pulling.
Automotive is still the larger book, about $165 million of last quarter's sales, driven by electric vehicles and driver-assist systems.
Industrial and Other, which includes data center and robotics, grew 59% year over year to about $94 million. That second bucket is where your upside lives.
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Why the Market Cares Again
Data center is becoming a real business. It reached a record 17% of sales last quarter, up from roughly 7% a year earlier, and grew 32% from the prior quarter.
Current sensors now make up about 22% of that business and carry margins in the mid-50s. Management expects data center revenue to more than double this fiscal year, and that is the number you want reaffirmed.
Robotics gives you a second leg. On October 20, Allegro launched a 48V power management chip for humanoid robots that it says cuts system footprint and hardware cost by 50%, plus new position and angle sensors for robot joints.
Robotics maker Sarcomere Dynamics is building Allegro's motion controllers, sensors, and power chips into its Scorpion gripper and plans to extend that to its 24-joint ARTUS Dex robotic hand.
Design wins point to more growth. Fiscal first quarter design wins rose 30% from a year ago, with new wins at large robotics customers in China and North America.
Design wins are the pipeline for revenue one to three years out, so this is the number to watch if you care about 2027 and 2028.
What the Financials Are Signaling
The guide already bakes in strong growth. Management guided fiscal second-quarter sales to $265 million to $275 million, which implies 26% growth at the midpoint, with non-GAAP EPS of $0.23 to $0.26.
Consensus calls for EPS of $0.25 on about $271 million of sales, slightly above the revenue midpoint, so you need a beat at the top of the range to get paid.
Operating leverage is the story underneath. Non-GAAP operating margin climbed to 19.4% last quarter from 11.1% a year earlier. Sales grew 27%, but profit grew much faster, and that gap is what you are really buying.
Supply, not demand, is the near-term limiter. Allegro has flagged back-end capacity constraints that left some demand unfilled.
That is a better problem than weak orders, but you want to hear on October 29 that new capacity is coming online on schedule.
The Valuation Problem You Shouldn't Ignore
This is not a cheap stock on current earnings. On our math, annualizing the midpoint of the EPS guide gets you roughly $1 a share, which puts the stock at around 30 times that run rate. You are paying for the data center and robotics ramp, not the current quarter.
Sequential growth is slowing, and you should not ignore it. Management guided data center growth down to the mid-single digits quarter over quarter after roughly 40% jumps, blaming the law of large numbers.
Listen closely to the call. If the October 29 commentary suggests customers are pausing, the market will read the slowdown as something worse.
The stock moves hard on sector headlines. Allegro has had dozens of 5%-plus moves over the past year, most of them tied to the semiconductor group rather than the company.
Size your position so a 10% swing doesn't shake you out before the thesis plays out.
Bear Case
Auto is still most of the business.
Automotive sales were roughly flat from the prior quarter, and a weak 2027 for global vehicle production would weigh on the larger half of the company no matter how well data center does. You own the auto cycle whether you want it or not.
Capacity constraints can cap the upside. If back-end supply stays tight into 2027, Allegro can't ship everything customers want, leaving room for competitors to win sockets.
Competition is bigger and better funded. Texas Instruments, Infineon, and Melexis all sell into the same automotive and industrial sensing markets, and the larger players can lean on price when they need volume.
The data center bar is now high. A doubling target is easy to cheer and hard to beat. An in-line quarter with cautious commentary could keep the stock pinned near its lows.
How I'd Frame a Position
Start with a starter position, not a full one. A third to half of your target size ahead of the October 29 report gives you exposure to a beat without betting the whole position on one print.
Add on proof, not on hope. If management reaffirms the data center doubling and shows bookings holding up, add the rest after the report. If the guide disappoints, you still have dry powder for a better entry.
If you already own it, hold through the print. The selloff has been sector-driven, and nothing in the last reported quarter broke the thesis. Trimming here locks in the drawdown without giving the data center ramp a chance to show up in the numbers.
Bottom Line
Allegro is growing sales at a 26% clip, data center is on track to more than double, and a new robotics business is lining up behind it. You are getting it more than 50% below its June high because the whole chip group sold off, not because the numbers broke.
Size it as a growth position, let the October 29 report confirm the data center story, and add from there if it does.
Setup Scorecard
Entry Zone: Low $30s, building in two or three tranches around the October 29 report
Target: $45 to $50 over 6 to 12 months, in line with recent Wells Fargo and RBC targets
Stop Loss: Reassess below $26 or on any cut to the data center outlook
Catalyst Timeline: Fiscal second quarter results before the open on October 29; robotics design-win updates and data center capacity news through early 2027
Confidence Level: Medium. The growth is real and the stock is far off its highs, but the multiple, the auto exposure, and capacity limits keep this from being a high-conviction call.
That's our coverage for today; thanks for reading! Reply to this email with feedback or any tech stocks you want me to check out.
Best Regards,
—Noah Zelvis
Tech Stock Insider