Robotics Long-Term Investment: Cheap Semiconductor Stock Pick (Not Nvidia) For 2025?
Hey everybody, welcome back to Chip Stock Investor. Hope you had a great weekend. Happy Monday. It's here again. It happens every week, every week. Every single week.
No case of the Mondays here though. We're good. We're great. We're going to get you caught up on a business we haven't covered in a long time, but we think it's probably a good time to do so, especially given the downturn in chip stocks, especially those that address power, sensors, industrial and automotive applications, and including robotics, right? We keep getting a lot of questions as of late about robotics. So we'll have a few things to tell you about robotics along the way today. We have been getting a lot of questions about robotics, and I think a lot of it maybe has to do with Tesla's Optimus Robot or NVIDIA's chips for robots.
There is some caution that needs to be had here. There's needs to be real world economic use cases for these things, not just really cool tech. And right now, the most clear use case is cars. Yeah, absolutely. Cars, um, also existing manufacturing sector equipment.
So, uh, like robotic arms that you maybe see in videos, swinging around, working in factories, could be an auto factory, some other piece of industrial equipment, pharmaceutical industry, is a big user of this stuff. And then maybe thirdly, um, somewhat related to the car use case, Kasey, e commerce and retail fulfillment warehouses. We should did an article on the company Symbiotic about a year ago.
We'll just link that article right here for you. We warned everybody last December about this. And if you'd like a refreshed video version of this, let us know in the comments. We'll tie back into the robotics later in this video, but let's key in on some news for the company Allegro Microsystems and here's a headline that has some bearing on Allegro. This is Polar Semiconductor and it was reported in September that they're going to be getting some Fed Chips Act funding as well as the state of Minnesota giving them some cash and tax incentives, plus some soon to be announced private funding to double down on its power and sensor chip fab capacity. You may be wondering what in the world does Polar Semiconductor have to do with Allegro? Give you a quick rundown on history here.
Polar semiconductor based in Minnesota, main fab in Minnesota. Not such an exciting business. It's an old fab dating back to the 1960s. It's very small. It's changed ownership several times. And as of late for the last couple of decades, it's, it's been part of a larger Japanese conglomerate called Sanken Electric, which we've talked about in the past when we've addressed Allegro Microsystems.
We'll come back to this in a moment. But when we're talking about this company, Polar Semi, and it's getting the Chips Act funding to expand its manufacturing, we can really categorize this in the industrial sector of the economy. That's our opinion. We think this is more of an industrialist, more than it is a hot technology business. Meaning this is really, companies like this, really, you need to be all concerned about financial discipline and how the company generates decent returns on invested capital. Not necessarily cutting edge innovation.
So why do we care about Polar Semi getting CHIPS Act funding? As Nick mentioned, Allegro and Polar both ended up under Sanken Electric. You can see that in the timeline here. Back in 1990, they established Allegro Microsystems in the U S. Polar Semiconductor established in the U S in 2005. And then in 2020, allegro Microsystems was listed on the NASDAQ global select market. Basically they were sort of spun off as their own company.
Sort of, sort of, we'll come back to that. Uh, the relationship here though, Sonken, the Japanese industrial conglomerate owns both Polar Semiconductor, which is the chip fab and Allegro Microsystems, which is a fabless designer, an engineering company for power and sensor chips. So just bear that in mind. So the reason why Polar Semiconductor got the Chips Act funding, of course, is to increase its fab capacity there in Minnesota. This checks the box for some of Allegro's U.
S. based industrial and auto customers that are interested in domesticating their supply chains. Maybe a U. S.
automaker like GM or Ford or Tesla, whoever, this might check a box for them saying, this company, Allegro, and one of its fabs, Polar Semiconductor, are both not just based in the U. S., but also have manufacturing operations based in Minnesota, in the United States. And you can see we have highlighted there that Allegro Microsystems owns approximately 10 percent of Polar Semiconductor. And this is why this Chips Act funding is actually beneficial for Allegro Microsystems. Normally, we'd chalk this all up to some political jockeying, but this one actually could have some benefit for a company like Allegro. Yeah, especially considering some of the other third party fabs that they utilize are UMC, United Microelectronics and TSMC, Taiwan Semiconductor Manufacturing, both of which are domiciled in Taiwan.
So especially for US based investors that are looking for a way to bet on this whole friend shoring and onshoring of manufacturing back to the United States, maybe a company like Allegro Microsystems makes a little bit of sense right here. We're going to show you a couple of new slides that Allegro Microsystems posted on their most recent earnings reports. The first one talking about their business model, and maybe Nick, you can explain to us a little bit more about Allegro's business model. Yes, so they are a fabless designer of chips, which means they outsource the manufacturing. And so when they outsource the front end part of the process, the silicon wafers that get developed and chopped up into chips. Those are the purple stars on this map there in the U S that's the Polar Semi fab in Minnesota.
And then you have a couple others, one in China and then a couple there in Taiwan. That would be UMC and TSMC. And then the green circles are the OSATs, the outsourced semiconductor assembly and test providers. So those are the companies that, specialize in chip packaging and then device assembly.
So taking the chips that Allegro designs and gets fabbed, than taking the diced up chips and putting them in a final device, like a part for a car or a part for a piece of industrial equipment. We're going to come back to this here momentarily and how it has affected Allegro Microsystems balance sheet, but in the, in the recent quarter, the company has done more to sort of separate itself a bit more from Sanken and Uh, also kind of tighten up the relationship with Polar Semiconductor, so Allegro Microsystems did repurchase $39 million worth of shares from Sanken Electric, reducing Sanken total ownership stake in Allegro from 51 percent majority shareholder down to 33%. This is probably going to be an ongoing thing. And then in addition to that, you can see that the CHIPS Act funding that will boost PolarSemi and as well possibly help Allegro Microsystems have tout itself as this fully U.
S. based and U. S. owned chip design company.
That's just a little bit on the business model. We'll come back to that here shortly. Kasey, what does Allegro Microsystems even do in the first place? Let's, let's get everyone up to speed. Yeah, allegro Microsystems is the number one leader in magnetic sensing.
They get 60 percent of their sales from magnetic sensors, and they've doubled down on this with the acquisition of Crocus, which we'll talk about here in just a moment. 70 percent goes to things like automotive sales and then Industrial 20%, 10 percent everything from gaming to power tools, maybe like a little chip that makes your PS5 controller vibrate or whatever. This is a slide Kasey had made, last year. Let's take a look at the more recent breakdown of the revenue here, because they have shifted this up a little bit. And basically we now just have everything falling into magnetic sensing, there in the little pie chart on the top, right, just over 60 percent and then power chips just under 40.
This is where we think a lot of investors that are hoping to bet on things like robotics, we think a company like Allegro, it's kind of interesting because there's a lot of hype out there about companies making actual robots, um, AI that's housed in some sort of physical chassis and interacts with the real world. A lot of those companies getting hyped are probably not going to be profitable, excluding some of the bigger tech businesses that dabble in that, but aren't a pure play on robotics. But a company like Allegro, could possibly very quickly turn the corner and become very profitable on this movement. Magnetic sensing is a key bit of sensor technology that you need for a physical computing system to be able to sense what's going on around it.
So like those robotic arms in manufacturing I mentioned earlier, or Driver ICs, integrated circuits for an electric motor. So oftentimes this is obviously going into a car. It could be a traditional internal combustion engine car, it could be an electric vehicle, or it could be some sort of hybrid in between. But also if you really think physical robotics are about to take off, a lot of these driver integrated circuits would be needed to drive every, every joint, every moving part in piece in a piece of industrial equipment. So this is just an interesting one to maybe put on your radar, if you haven't had it there already for this, for this reason, this, this company does power chips, but also primarily these sensors and drivers based on magnetic sensing technology.
Before we talk about some of the financials for Allegro Microsystems, we'll show you some charts from our friends at FinChat, but we want to give a quick shout out to FinChat. io. They're the sponsor of today's video, and they're offering 25 percent off any paid plans for their Black Friday sale. It ends at midnight tonight, on December 2nd. On December 2nd.
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Check it out through December 2nd, 25 percent off. Or after December 2nd, 15 percent off using our link. Okay, let's get back to the financials for Allegro. This slide is showing the revenue net income and free cashflow.
You can see that Allegro was scaling up quite nicely before the downturn hit their net income free cashflow were both in the positive, but then the downturn kind of, came for Allegro and their net income became negative and their free cash flow dwindled. And that's still the situation right now. As as you may know if you've been following our videos here the whole industrial and automotive supply chain including a lot of chip stocks that supply auto makers and industrial equipment makers have been hit pretty hard. Allegro is, as you can see, quite small, uh, compared to a lot of, uh, the bigger industrial chip makers and chip suppliers. And so their profitability is even more sensitive than average to this downturn.
This is the hole that they need to dig themselves out of, but there is some good news. There is expected to be a rebound in industrial and sensor and power chip sales in 2025. So the WSTS forecast, this goes back to earlier this year in spring of 2024, we'll provide our own commentary on what to actually expect for 2025, you can see an expected uptick 6 percent rebound in 2025 over 2024.
We'll talk about what that is going to possibly look like here momentarily, but still the overarching theme here is 2025, it's looking like it will be much better than 2024 for companies like Allegro. But let's backtrack here to the balance sheet, which we talked about earlier and Allegro needing to part ways a bit more with Sanken. Here's the balance sheet. Yeah, we were actually a little concerned about Allegro when they made that Crocus acquisition, but the balance sheet actually is in better shape than we thought after that acquisition closed last year. There's definitely some more work to be done separating from Sanken and Polar, but still not too bad. After that acquisition, you can see the debt has spiked up to just over $387 million.
However, short term cash, just under $200 million. Long term investments sitting at $30 million. So all in all, not the worst. Yeah. And the reason for the most recent spike in the debt was Allegro took that out in order to start making those share repurchases from Sunken to reduce Sunken's total ownership of Allegro.
So that's the reason why that is in place, and this is, this is an evolving story. We'll, we'll keep an eye on this, and this is something that if you decide to follow Allegro Microsystems, you might want to keep an eye on as well. Okay.
Now here are the valuation metrics for Allegro. Forward price to earnings right around 54 times, forward price to free cashflow over 107 times. This valuation only makes sense if you believe Allegro can get back to the sales volume that it had in 2022, which should correspond with a broader market rebound, that it is forecasted in 2025. That's what we talked about on that WSTS slide regarding sensors specifically. Okay, Kasey, finally we've gotten to the acquisition of Crocus that closed last year, which was a small startup.
What are TMR sensors? That's a fantastic question. TMR stands for tunneling magnetoresistance sensors. These sensors are integrated circuits.
We have a video explaining the TMR sensors from Allegro. You can watch the full video. It's only a minute and a half long. We'll show a quick clip of it here. TMR sensors are really kind of taking the torch from some older sensor technology called Hall Effect sensors and these things are expected to grow at a pretty decent clip through the end of this decade.
We mentioned earlier about the motor driver integrated circuits. These are essentially what these are for. It helps drive, a motorized system.
So any moving part ultimately needs a motor drive in it. These TMR sensors are very, very sensitive sensors that increase the accuracy and the speed in which they operate. And this is why Allegro ultimately acquired this startup called Crocus. They expect that the Hall Effect sensors will kind of lose market share over the course of the next couple of decades.
And they think TMR is where a lot of the money will ultimately head, because of the increasing sensitivity needed for things like EVs, autonomous vehicle systems, and of course, robotics, especially industrial robotics that are used in things like manufacturing. We're talking about these TMR sensors. It seems like it would be big safety benefit, right? Especially with advanced driver systems, industrial applications, and robotics. The faster, the more accurate the sensing, the better the outcome. Yeah, absolutely. Per usual though, the main problem with these things is they're more expensive than the older technology.
And so that's why adoption is going to be very slow and it's going to be gradual. Remember Kasey said earlier at the video, you need to have an economic use case for robotics. We're not just going to have robots walking around the world with us, because no one is going to invest in that unless there's a good reason for it.
And, uh, more reasons for investing in that stuff will become available as the underlying technology gets more affordable and cheaper. So, do take it slow with this type of stuff. But again, if this is on your radar and you're looking for a way to invest in it, a company like Allegro Microsystems is one that we think should at least be on your radar, something that you should be aware of and you can start to understand more of the underlying technology behind robotics and physical AI.
One thing that you do need to keep in mind is the cycle bottom for the auto industrial, power. We have that labeled there in the bottom. It's taking much longer to recover than I think we expected and the market in general expected.
All indications are that power and sensor chip inventories are coming back down to a more normal level, which sets the stage for a more gradual recovery in 2025. So all that said, let's talk about what our final key takeaway is for Allegro Microsystems. This is our current CSI power and sensor basket.
On Semi, Microchip, Monolithic Power Systems. We also have some small cap companies, Aehr Test Systems and Axcelis. We don't have Allegro Microsystems, why not? At this point, our basket is pretty well diversified in this market. We kind of treat this almost as like all one asset. Individually, each of these businesses doesn't really make up a core position in our portfolio, but collectively they do. And so adding yet another sensor company, even if the sensors, the hall effect sensors and the TMR sensors that Allegro does, adding it to the basket doesn't really add anything different than what we already presently have, for us personally.
And that's because, like Kasey explained in the previous two slides, these magnetic sensor chips are going to very closely align with the recovery in good old fashioned industrial and power chips, like what we already have. Some of these companies as well, like Monolithic Power Systems, also do some things in magnetic sensors as well. So, for us personally, we're not adding Allegro. If we were going to add Allegro though, it would be part of our small bets basket, a very, very small position, well under 1 percent of our total portfolio along with Aehr and Axcelis. That said, this may be a good company for your portfolio personally. Hopefully presenting this information helps you make a good decision for your portfolio.
And do mind the risk. Robotics is super exciting, uh, thinking about a recovery and automotive and industrial is also exciting, but Allegro does have some unique challenges, as it kind of re positions itself as a U S based company and continues to, you don't have to spend money ultimately separating itself from it's, it's old Japanese industrialist, a parent organization. So mind those risks.
Also, it's not currently a profitable business much at all. So there's some peculiar challenges for Allegro, but if they're able to pull it off, perhaps that ugly looking valuation chart that we showed you earlier from FinChat. io starts to look, uh, much prettier in 2025.
So keep an eye on this one and join us on Semiconductor Insider. Also Cyber Monday sale for us. That's going on the rest of December, really. Only $5 a month if you sign up before 2025.
It goes up to $10 a month starting in 2025. So we'll be talking about Allegro over there. If you want to join us and our community on those discussions. Thanks for watching this episode today of Chip Stock Investor. See you again soon.
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2024-12-08 22:18
