Allegro MicroSystems: Magnetic Sensor Leader

In this analysis of Allegro MicroSystems, Inc. (NASDAQ:ALGM), our objective is to assess the company's ability to maintain its dominant position in the magnetic sensor market, given that this segment constitutes the most substantial portion of its business. Our approach involves a thorough examination of the company's revenue breakdown, focusing on its PIC and magnetic sensor segments, to pinpoint the primary driver of its growth. Additionally, we delve into the magnetic sensor market itself, shedding light on the factors propelling its growth and providing an outlook for the future. Lastly, we conduct a comparative assessment of the company's market positioning within the magnetic sensor sector, seeking to ascertain whether it enjoys a competitive advantage over its industry rivals.

Improved Performance in Both Magnetic Sensor and Power IC Segments

Source: Company Data, Khaveen Investments

Based on the table above of the company's revenue segment breakdown, the company's two main segments include its Power Integrated Circuits (PIC) segment which encompasses products such as "high-temperature and high-voltage capable motor drivers, power management ICs, light emitting diode ("LED") driver ICs and isolated gate drivers", as well as the Magnetic Sensor ('MS') segment which products enable precise motion measurement, speed determination, position tracking, and current sensing based on its annual report.

The largest revenue-contributing segment is the MS segment which represented 61.5% of the company's total revenue, highlighting its significance to the company, while its PIC segment accounted for the remainder or 38.5% of its revenue. The PIC segment has an impressive average growth rate of 20% over the period and surpasses that of the MS segment which averaged 10%. Nonetheless, both segments have shown significant improvement over the years with improved growth from negative in 2020 to strong double-digit growth in 2023, resulting in the company's total growth rising from -10% in 2020 to 26.7% in 2023 and an average growth of 9% over the period.

From the company's latest earnings briefing in Q1 2024, its PIC segment growth had slowed down but still grew strongly by 29% YoY which was above its average growth. On the other hand, its MS segment growth improved compared to 2023 with a growth of 27% YoY.

The magnetic sensor market has a projected CAGR of 9% according to Yole Development, while the company's MS segment growth in Q1 2024 (27% YoY) and even in 2022 and 2023 was significantly higher at 29.5% and 19.6% respectively, indicating that the company's growth was due to company-specific reasons rather than market growth which we further examined below.

Positive Sensor Market Outlook

In this section, we examined the magnetic sensor market size in comparison with the overall semiconductor market and its outlook by identifying the growth drivers for the market. We then analyzed the market and the company's revenue breakdown by end markets.

Source: WSTS, Statista, Yole Development, Proficient Market Insights, Mordor Intelligence, Expert Market Research, Khaveen Investments

Based on the table above, the total semicon market was $556.57 billion in 2022 based on WSTS. Within that, the DAO semicon market segment accounted for 48.5% of the total semicon market and has a lower forecast CAGR of 7.2% compared to 9.2% for the total market. Furthermore, the sensor semicon market is only 4% of the total semicon market but with a slightly higher CAGR than the total semicon market. Within the sensor market, the magnetic sensor market was valued at $2.6 bln in 20221 and projected to grow a CAGR of 9% according to Yole Development, lower than the total sensor market but higher than DAO and in line with the total semicon market CAGR. Compared to the semicon market, magnetic sensors only account for a minor segment of the market at 0.5% of the total semicon market.

Based on Markets and Markets and MarketResearch.biz, the growth of the magnetic sensor market is driven by several factors. Some of the key drivers include:

Source: Company Data, Yole Development, Khaveen Investments

Furthermore, we compiled the magnetic sensor end markets by revenue in 2021 and forecast CAGR by Yole Development. As seen in the table, the automotive segment is the largest end market, accounting for 65% of the total magnetic sensor market followed by the consumer segment. Additionally, the automotive segment has a CAGR of 10% driven by the rising adoption of ADAS, which is the second highest by end market behind Industrial but only accounts for 11% of the market.

In terms of the company's revenue breakdown by end markets, the Automotive segment represented the largest segment accounting for 68% of its revenues. The segment's share of revenue is also over 3 times higher than its Industrial segment which is its second-largest segment. Overall, the company's revenue by end market shows that the share of its automotive exposure (68%) is slightly higher than the magnetic sensor market breakdown (65%). Additionally, its exposure to the industrial end market (20%) is significantly higher than the magnetic sensor market breakdown (11.5%). Thus, we believe this bodes well for the company to capitalize on the high-end market growth in both industrial (11%) and automotive segments (10%) which has a higher forecast CAGR than the overall magnetic sensor market growth (9%). From its latest earnings briefing, the company's focus on its automotive (e-mobility) and industrial (clean energy and automation) segments was highlighted.

We continue to sharpen our market focus on e-Mobility and select Industrial markets, including Clean Energy and Automation, with sales in these strategic growth areas increasing 63% year-over-year to $159 million or 57% of total sales, up from 45% in Q1 of 2023. - Vineet Nargolwala, President and CEO

Overall, while the magnetic sensor market is only a minor portion of the total semicon market accounting for 0.5% of the market, we believe that its positive growth outlook with a market forecast CAGR of 9% driven by rising demand for advanced applications such as autonomous vehicles and renewable energy bodes well for the company. Additionally, we believe the company's high exposure to key end markets such as automotive and industrial further supports its growth outlook. Notwithstanding, its relatively higher exposure in higher growth automotive and industrial still does not explain its superb performance over the past 2 years growing twice the market growth rate, thus we examined whether the company has any competitive advantage below.

Product Breadth Advantage Supports Market Leadership

According to the company's investor presentation, the company highlighted its market share leadership in the magnetic sensor market and also highlighted its accurate and reliable magnetic sensor products. We examined the company's market share below in the magnetic sensor market.

According to Yole Development, Allegro Microsystems was the market leader of the magnetic sensor market in 2021 with a 16% market share. Trailing behind closely is Infineon (OTCQX:IFNNY) with a 15% market share. In third place, AKM stood with a 10% market share. Combined, these 3 companies accounted for 41% of the market share, which highlights the strong positioning of these top companies. Based on Omdia, Allegro Microsystems was also the market leader in 2015, thus we believe it has maintained its position as the market leader.

Source: Company Data, DigiKey, Khaveen Investments

Based on the table, we compared the top 3 magnetic sensor companies based on their product breadth and performance by compiling their number of magnetic sensors, bandwidth, resolution and sensing range to determine whether the company has a performance advantage. Allegro Microsystems boasts an impressive number of sensors (1119), indicating a wide range of applications. Infineon, on the other hand, offers a relatively lower number of sensors (380) while AKM has the smallest portfolio among the 3 companies.

In terms of max bandwidth which defines the frequency range for accurately detecting magnetic field changes, Allegro Microsystem has the highest at 400khz. However, in terms of resolution, AKM has the highest at 18b with Allegro Microsystems behind Infineon in second. Magnetic sensor Magnetic Angle Sensors: Resolution Explained is its ability to detect and measure the smallest magnetic field changes accurately, allowing for greater precision in measurements. Moreover, Infineon's products have the highest sensing range of ±400mT followed by Allegro Microsystems. A magnetic sensor's sensing range defines its adaptability for detecting varying magnetic field strengths, crucial in applications like industrial and automotive. Therefore, our comparisons indicate that its competitors' magnetic sensors have greater capabilities in terms of accuracy.

Overall, we believe that Allegro Microsystems's market leadership position is supported by its wide product breadth rather than performance advantage which we determined its competitors to be competitive in terms of sensor resolution and range.

Risk: Competition Against Large Companies

We believe one of the risks for the company is its competition in the sensor market against larger companies. The company competes with Infineon which is a significantly larger company compared to Allegro Microsystems with a more diverse sensor portfolio including pressure and radar sensors. Furthermore, Infineon's market share in the automotive sensor market (16.1%) is twice that of Allegro (8%), which also trails behind NXP (NXP) and Bosch.

Verdict

In summary, magnetic sensors play a pivotal role in the company's operations, constituting its largest revenue segment at 61.5% and displayed superb growth and improvement over the past 5 years. Notably, it has achieved an impressive average growth rate of 25% over the last two years, surpassing the market's projected CAGR of 9%. Furthermore, we have observed that the company has a relatively high exposure to key high-growth sectors, particularly in industrial and automotive applications. However, we attribute much of its exceptional growth to its competitive advantage in product breadth. Looking ahead, we anticipate that the company will continue to prosper due to the favorable prospects in the magnetic sensor market, driven by the increasing adoption of magnetic sensors in cutting-edge applications like autonomous vehicles and renewable energy solutions. Based on analysts' consensus price target, we rate the company as a Strong Buy with a target price of $55.33 which is an upside of 71.7% as the company's stock has had a recent sharp selloff of 29% since July 2023.