On Friday, Wolfe Research raised its rating on shares of Allegro MicroSystems (NASDAQ:ALGM) to Outperform from Peer Perform, setting a price target of $35.00. This upgrade comes after a significant drop in the company's stock value, which has seen a decline of over 45% from its midyear high.
The decision to upgrade was influenced by the recent earnings call, where Allegro MicroSystems provided guidance that led to an earnings reset. Wolfe Research highlighted that they had previously refrained from upgrading Allegro along with other analog companies due to potential risks of a more substantial reduction in estimates as customers were reducing inventory levels. The firm views the post-earnings estimate cut as substantial but not as severe as that of Mobileye, which may explain the positive reaction of the stock.
Wolfe Research noted that the inventory reduction by customers is considered a temporary situation. The analyst firm compared Allegro's peak quarterly year-over-year decline in its automotive and industrial segments to Analog Devices (NASDAQ:ADI), Inc., finding them to be similar. The decline in revenue is believed to be steeper than the actual downturn in end-market demand, which provides an opportunity for inventory normalization to act as a catalyst for a positive correction.
Allegro MicroSystems, which specializes in magnetic sensors and derives 75% of its revenue from the automotive industry, is seen by Wolfe Research as having a strong and defensible position in the market. The firm anticipates that the company can achieve mid-teen percentage year-over-year growth over the long term, with no expected changes in the competitive landscape.
Wolfe Research's fiscal year 2026 (ending March) estimates reflect an earnings power of $1.14 per share after inventory levels normalize, which supports a 23x multiple. This valuation is considered reasonable by the firm, especially when compared to Allegro's average multiple of around 30x since its initial public offering.
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