What a time it’s been for Allegro MicroSystems. In the past six months alone, the company’s stock price has increased by a massive 85.6%, reaching $49.53 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Allegro MicroSystems, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Allegro MicroSystems Not Exciting?
We’re glad investors have benefited from the price increase, but we’re swiping left on Allegro MicroSystems for now. Here are three reasons you should be careful with ALGM, plus one stock we’d rather own.
1. Revenue Tumbling Downwards
Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore’s Law) could make yesterday’s hit product obsolete today. Allegro MicroSystems’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 7.9% over the last two years. 
2. Breakeven Operating Margin Raises Questions
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Allegro MicroSystems was roughly breakeven when averaging the last two years of quarterly operating profits, lousy for a semiconductor business. This result isn’t too surprising given its low gross margin as a starting point.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Allegro MicroSystems, its EPS declined by 15.8% annually over the last five years while its revenue grew by 8.5%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Allegro MicroSystems isn’t a terrible business, but it doesn’t pass our bar. After the recent surge, the stock trades at 51.8× forward P/E (or $49.53 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at the most dominant software business in the world.
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