ALGM Q2 Deep Dive: Automotive and Data Center Demand Offset Margin Pressures

Chip designer Allegro MicroSystems (NASDAQ:ALGM) reported Q2 CY2025 results exceeding the market’s revenue expectations, with sales up 21.9% year on year to $203.4 million. Guidance for next quarter’s revenue was better than expected at $210 million at the midpoint, 1.4% above analysts’ estimates. Its GAAP loss of $0.07 per share was significantly below analysts’ consensus estimates.

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StockStory’s Take

Allegro MicroSystems’ second quarter results were mixed, with revenue surpassing analyst expectations but profitability falling short. Management attributed the strong sales growth to ongoing momentum in automotive e-Mobility, particularly for electric vehicle (EV) and advanced driver-assistance system (ADAS) applications, as well as robust performance in data center and industrial segments. CEO Mike Doogue highlighted that "current sensors for xEV applications like high-voltage traction inverters and onboard chargers" were major contributors to automotive growth, while data center and robotics demand drove industrial expansion. The market’s negative reaction reflected concerns about the company’s lower-than-expected earnings and continued operating margin challenges.

Looking ahead, management outlined a positive outlook driven by continued customer demand in strategic focus areas such as automotive e-Mobility, data centers, and robotics. Guidance for the next quarter reflects optimism about further backlog growth and design wins, with CFO Derek D’Antilio citing strong bookings and ongoing reductions in distributor inventories as key indicators. Management also discussed plans to leverage cost optimization efforts and new product introductions to support margin improvement, while acknowledging the need to monitor tariff impacts and supply chain dynamics. The company remains focused on executing its strategy to expand market share in high-growth applications.

Key Insights from Management’s Remarks

Management credited higher automotive content in EV and ADAS, along with expanding data center demand, as core drivers of the quarter’s growth. However, elevated operating expenses and margin headwinds tempered the positive topline outcome.

• Automotive e-Mobility momentum: Sales in the automotive sector were lifted by strong demand for current sensors in xEV (electric and hybrid vehicle) applications, including traction inverters and onboard chargers. Management emphasized that ADAS and EV content growth is expanding Allegro’s footprint with global automakers, with a notable design win from a leading Chinese OEM.
• Data center and industrial resurgence: The industrial segment benefited from a resurgence in data center investment, particularly for high-bandwidth current sensors and motor drivers supporting AI and cloud infrastructure. Robotics and clean energy also contributed to sequential and year-over-year growth.
• New product innovation: Allegro launched an ASIL-C current sensor IC for xEV inverters, allowing customers to reduce the number of sensors per inverter while meeting stringent automotive safety standards. The introduction of U-core current sensor ICs and a 48-volt motor driver IC for AI data centers further diversified the product lineup.
• Inventory and channel management: Management reported ongoing reductions in distributor inventory and noted that select parts are now in shortage, signaling a recovery in underlying demand. Point-of-sale activity in distribution channels reached its highest level in nearly two years.
• Margin improvement efforts: Cost optimization initiatives, such as manufacturing flow enhancements and higher test yields for TMR (tunnel magnetoresistance) devices, supported gross margin gains. However, operating expenses remained elevated due to increased R&D and variable compensation, partially offsetting these benefits.

Drivers of Future Performance

Allegro MicroSystems expects sustained growth from rising EV adoption and continued strength in data center and robotics, while monitoring margin pressures and evolving trade conditions.

• End-market demand tailwinds: Management anticipates continued expansion in automotive e-Mobility, with secular trends like increased EV adoption and stricter ADAS safety requirements driving Allegro’s content per vehicle. Industrial demand is expected to remain strong, especially in data center and automation markets.
• Margin recovery initiatives: The company plans to improve gross margins through manufacturing efficiency, supplier negotiations, and scaling new products with higher value-add. CFO Derek D’Antilio pointed to cost reductions and the rollout of differentiated products in China as important levers for future profitability.
• Tariff and supply chain risks: Management cited ongoing uncertainties around tariffs and potential supply chain disruptions. Although current impacts are limited, the company remains vigilant, especially regarding downstream effects in automotive and industrial markets, and is actively executing a China-for-China supply chain strategy to bolster competitiveness.

Catalysts in Upcoming Quarters

In the coming quarters, key areas to watch will be (1) sustained momentum in automotive e-Mobility design wins and content expansion, (2) continued recovery and inventory normalization in distribution channels, and (3) the impact of new product adoption in data center and industrial markets. Additionally, margin trends and the effectiveness of cost optimization efforts will be important indicators for improved profitability.

Allegro MicroSystems currently trades at $32.01, down from $33.87 just before the earnings. In the wake of this quarter, is it a buy or sell? See for yourself in our full research report (it’s free).

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