Allegro Microsystems In-Line Quarter Meets High Bar, Data Center Momentum Preserves Long-Term Thesis

Core Conclusion

Allegro Microsystems delivered a MarQ revenue beat and in-line guidance, but the June quarter guide lagged peers who posted stronger raises. We view this as an expectations miss rather than a deterioration in the long-term thesis. The stock had run up 47% in the prior month, setting an exceptionally high bar. The underlying secular drivers—data center growth, focus auto content gains, and a credible path to >55% gross margin—remain intact. We maintain Overweight and our $51 price target.

What the Market May Be Underappreciating

The market is focusing on the relatively soft auto guidance (+2% q/q in JunQ) versus peers and forgetting that Allegro’s recovery cycle started earlier. It now faces tougher comparisons, while peers are still benefiting from sharper inventory restocking. The auto guide weakness is a timing dynamic, not demand deterioration: inventories are thin, China ADAS design wins are strong, and backlog is at multi-year highs. The “delinquency” comment referred to back-end capacity constraints—a positive demand signal—and CapEx is being directed toward Philippines back-end capacity ($17M in Q4). Separately, data center is accelerating in both revenue and mix. Current sensors now represent ~20% of DC revenue (vs. ~10% last quarter and near zero entering FY26), improving margin profile. The data center story is not fully priced given peers’ lack of comparable exposure.

Evidence Chain

1. Data Center Revenue Hits Record, Mix Improving
MarQ DC revenue reached 14% of sales (record), guided to 16–17% in JunQ, implying 20–25% sequential growth. Current sensors are driving higher margins vs. the legacy motor-driver-heavy mix. Fan driver durability appears better than feared, with growth in power supplies/networking offsetting liquid-cooling displacement. We model DC reaching 16% of sales in CY26 and 18% in CY27.

2. Auto Guide Lagged Peers but Fundamentals Solid
Auto was flat q/q at $164M in MarQ and guided up only a couple of points in JunQ, below the peer-driven bar. However, inventories remain thin with no broad restocking embedded for CY26. Focus Auto expected to grow ~30% y/y in FY27. China ADAS design wins are strong. The back-end capacity spend is a positive for backlog conversion.

3. Gross Margin Bridge Intact
JunQ GM guide of 50.5% was in line with our estimate. Headwinds from gold, fuel/freight, and Philippines costs are modest. Price increases exiting JunQ appear to be cost recovery, not broad pricing power. The long-term path to >55% GM relies on volume leverage, gold-to-copper conversion, supplier cost-downs, and factory efficiencies. We model continued expansion over the next three years.

4. Design Wins and Backlog Support LT Model
FY26 design wins up >30% y/y. Backlog at multi-year highs. The company is investing in capacity to convert that backlog. No sign of fundamental deterioration.

Key Divergences and Risks

• Expectations vs. Reality: The June quarter guide was in line with our estimates but disappointed relative to peers. Consensus had moved higher. This creates near-term volatility but not a thesis break.
• Competitive Risk: Potential share loss in magnetic sensing to Infineon or Melexis. Large auto customers could demand pricing concessions. Data center competition could emerge.
• Sanken Stake Sale: Sanken’s potential sell-down overhangs the stock.
• Gradual Margin Trajectory: GM expansion will be gradual, and the >55% target depends on volume recovery that may take longer if auto recovery stalls.

Valuation or Trading Implications

Our $51 price target is based on 35x CY27 non-GAAP EPS of $1.45, a slight discount to the stock’s long-term average P/E since 2022. This multiple is a premium to auto semi peers but in line with higher-margin analog/MCU companies, justified by Allegro’s secular growth vectors in data center and auto electrification. Our estimates are mostly unchanged: CY26 revenue $1,048M (up from $1,022M), EPS $0.93 (vs. prior $0.92); CY27 revenue $1,247M, EPS $1.45. The stock’s risk/reward remains attractive with a base case of $51 and bull case of $70 (40x CY27 EPS of $1.76). The primary risk to our rating is a more muted recovery; however, current data supports the recovery continuing. We see the pullback as a buying opportunity for investors with a 12–18 month horizon.

Appendix: Key Financial Estimates