RBC Capital upgrades Arxis stock rating on M&A activity, pricing

RBC Capital has begun covering Allegro MicroSystems Inc (NASDAQ:ALGM) with an outperform rating and a price target of $50.00, marking a significant shift in their outlook for the company. The firm has identified Allegro as a leader in magnetic position and current sensing integrated circuits, as well as a growing presence in power ICs.

Despite a recent 38% decline from its 52-week high of $71.77, Allegro MicroSystems' stock has still increased nearly 38% year-to-date. However, InvestingPro analysis suggests that the stock is currently overvalued relative to its Fair Value, driven by elevated expectations, particularly in the fast-growing data center business. RBC Capital attributes the decline to these high expectations but remains confident in the company's fundamentals, citing secular content expansion in the automotive industry and potential data center growth as drivers of approximately 20% revenue growth with 200 basis points of gross margin expansion over the next two years.

At a valuation of around 26 times estimated earnings per share for the calendar year 2027, RBC Capital considers the risk-reward attractive and does not rule out potential mergers or acquisitions, given the company's track record. The company's recent first-quarter fiscal 2027 results, which exceeded Wall Street expectations for both earnings and revenue, further bolster RBC Capital's confidence in the stock.

Despite this positive performance, the stock saw a decline in premarket trading as investors questioned the pace of near-term growth and margin improvement. Additionally, Allegro MicroSystems recently held its Annual Meeting of Shareholders, where three new Class III Directors were elected to serve until the 2029 Annual Meeting.

The voting results reflected strong support for the nominees, with Jennie M. Raubacher, Brian C. White, and Robert J. Willett all receiving substantial votes in their favor. Analyst Gary Mobley from StoneX has also reiterated a buy rating on Allegro MicroSystems, maintaining a price target of $60.00, noting that the current stock price represents an attractive buying opportunity at approximately 17.0 times target earnings per share levels.