Allegro MicroSystems Being The Leader In Critical Magnetic Sensors For EVs Justifies Premium Valuation: Analyst

Bank of America Securities reinstated coverage of Allegro Microsystems (ALGM) with a Buy rating and a $38 price target, citing the company's leadership in magnetic sensors for EVs and ADAS, as well as emerging opportunities in power management for data centers and clean energy. The analyst projects industry-leading growth for Allegro, with a 13% sales and 46% adjusted EPS CAGR from 2024 to 2027, despite potential headwinds including automotive market volatility, competition, and a potential stock overhang; ALGM shares are up 8.31% following the report.

Analysis

Bank of America Securities has reinstated coverage on Allegro Microsystems (ALGM) with a Buy rating and a $38 price target, signaling strong conviction in the company's leadership in magnetic sensors, which constitute 65% of its sales and are critical for electric vehicles (EVs) and advanced driver-assist systems (ADAS). The analysis further highlights emerging growth opportunities in power ICs (35% of sales) for data centers and clean energy. Analyst Vivek Arya projects an industry-leading 13% sales and 46% adjusted EPS compounded annual growth rate (CAGR) for Allegro from calendar 2024 to 2027, representing 1.3 times the sales growth and 3 times the earnings growth of its peers, despite near-term auto demand weakness. Allegro is anticipated to compete in a $12 billion serviceable available market (SAM) by 2030, expanding at a 9% CAGR, with Arya expecting ALGM to outgrow both its $8 billion auto SAM (7% CAGR) and $4 billion industrial SAM (12% CAGR). BofA forecasts calendar 2027 sales of $1.1 billion, aligning with the calendar 2023 peak, a 27% EBIT margin (below the 30% peak), and $1.35 in adjusted EPS (below the $1.47 peak), with an upside scenario pushing adjusted EPS to $2 if sales growth accelerates to 20%, gross margins recover to 58% from approximately 46%, and EBIT margins reach 32% from the current circa 9%. However, cautions include a potentially slower auto semiconductor recovery compared to industrial, intense competition from rivals like Infineon and Melexis, risks to premium auto demand from tariffs and changing consumer preferences, a notable stock overhang from Sanken Electric's 32% stake (lock-up expiring in September), and a premium valuation at 35 times calendar 2026 P/E that could face compression from market volatility. Fiscal 2026 revenue is projected at $831 million with $0.51 adjusted EPS. The reinstatement and positive outlook contributed to an 8.31% rise in ALGM's stock to $31.03.

Key Decisions for Investors

• Investors should consider the analyst's Buy rating and Allegro's robust long-term growth trajectory, driven by its strong position in EV, ADAS, and industrial markets, alongside the projected 46% adjusted EPS CAGR through 2027.
• Careful monitoring of key risks is warranted, including the pace of the automotive semiconductor market's cyclical recovery, competitive dynamics, the potential share price impact from Sanken Electric's lock-up expiry in September, and the sustainability of Allegro's premium valuation.
• Given the recent 8.31% share price appreciation following the report, investors might evaluate entry points strategically, while acknowledging potential volatility stemming from industry cyclicality and specific company headwinds mentioned in the analysis.