Allegro Microsystems: A Small-Cap Beacon in a Sea of Fed-Fueled Growth

The Federal Reserve's pivot toward rate cuts has reignited the appeal of small and mid-cap equities, a segment historically primed to outperform as corporate borrowing costs decline and profit troughs reverse. Among the beneficiaries, Bank of America's (BofA) recent analyst coverage highlights Allegro Microsystems (ALGM) as a standout play in the $12 billion magnetic sensor and power management chip sectors. This article explores how ALGM's alignment with infrastructure spending, margin expansion potential, and underappreciated market share gains positions it as a compelling valuation arbitrage opportunity in 2025.

Growth Catalysts: Infrastructure, Margins, and Market Share

1. Infrastructure Spending Meets EV Demand
The global push for electric vehicles (EVs) and advanced driver-assist systems (ADAS) is driving unprecedented demand for Allegro's magnetic sensors, which are critical to managing motor control in EVs and safety systems in autonomous driving. With governments worldwide pledging trillions to clean energy infrastructure, Allegro's $8 billion auto-sector opportunity—growing at 7% annually—is a direct beneficiary.

2. Margin Expansion: A Path to Profitability
Allegro's current EBIT margin of ~9% lags its 2019 peak of 32%, but Bank of America analysts argue this is temporary. By 2027, operational efficiencies and pricing power could push margins to 32%, aligning with its power IC roadmap. The company's pivot into high-margin power management chips for data centers—targeting a $4 billion industrial SAM growing at 12% CAGR—adds a second growth lever.

3. Underappreciated Market Share Gains
Allegro's 65% market share in magnetic sensors for EVs is underrecognized by the broader market. Competitors like Infineon and Melexis face supply chain constraints, while Allegro's vertical integration—coupled with its $12 billion total addressable market (SAM) by 2030—positions it to dominate both auto and industrial segments.

Valuation Arbitrage: A 35x Multiple on Future Growth

Despite a 35x 2026 P/E ratio, Bank of America's $38 price target (implying a 33% upside from current levels) assumes Allegro's growth trajectory justifies its premium. Key data points:

• 2026 Projections: $831 million in revenue and $0.51 adjusted EPS reflect near-term headwinds, but 2027 scenarios suggest $1.35 EPS in a base case and $2.00 in an upside scenario if margin targets are met.
• Valuation Risks: A 32% stake held by Sanken Electric, expiring in September (post-lockup), poses potential volatility. However, BofA notes the likelihood of strategic buyers, not short-term traders, acquiring the stake.

Fed Rate Cuts: Fuel for Small-Cap Outperformance

The Fed's expected 50-basis-point rate cut by year-end will disproportionately benefit small-cap firms like Allegro. Lower borrowing costs reduce refinancing pressure on debt-heavy balance sheets and boost equity valuations. Historically, small caps outperform large caps by 12–18% in the 12 months following a rate cycle peak—a dynamic now in play as the Fed pivots.

Investment Thesis: Buy ALGM for Growth and Valuation Re-rating

Allegro's stock currently trades at $31.03, 22% below its 2023 peak, despite its strategic positioning in EVs and industrial tech. The Fed's easing cycle, coupled with its SAM expansion and margin recovery, creates a compelling risk-reward profile.

Action Items:
- Buy ALGM at current levels, targeting BofA's $38 price target (18% upside).
- Monitor Q3 2025 auto demand and stake-sale developments post-September.
- Use Fed rate cut expectations (tracked via ) as a catalyst for entry.

Conclusion

Allegro Microsystems exemplifies the small-cap renaissance of 2025: a company at the intersection of infrastructure spending, margin expansion, and undervalued market share. While risks like stake sales and competitive pressures linger, the combination of BofA's bullish analysis and Fed-friendly macro conditions makes ALGM a standout pick for investors seeking asymmetric returns in a post-rate-hike world.