Allegro’s Second Act: Data Center Now Drives the Growth Story

The sensor maker’s pivot from auto to AI racks is real — but the tape is already second-guessing it.

ALGM · Earnings Call · 2026-05-07

The Pivot Is Real

Fiscal 2026 was the year Allegro MicroSystems stopped being just an auto-play. The company finished its fifth consecutive quarter of sales growth at $243 million, up 26% year-over-year, and — more importantly — strength in data center became a structural feature of the story rather than a one-quarter spike. In the quarter, data center revenue reached 14% of total sales, up from 10% in Q3 and just 8% in Q2. Only a year earlier, it was a low-single-digit sliver of the mix. CEO Mike Doogue framed this as a content-led expansion, not just unit growth:

Because we solve the thermal and sensing challenges that come with extreme power density, our content opportunity per rack scales from approximately $150 in today's servers to over $425 in next-generation AI configurations.
Michael Doogue, President and Chief Executive Officer · 2026-05-07

The revenue ramp is already visible. CFO Derek D’Antilio noted, “Sales to our data center customers were 14% of Q4 sales, up from 10% in Q3 and 8% in Q2” (“Sales to our data center customers were 14% of Q4 sales, up from 10% in Q3 and 8% in Q2” — Derek D'Antilio, Chief Financial Officer · 2026-05-07). More striking is the mix within that business: Current Sensing — the higher-margin, high-value products — went from virtually zero at the start of fiscal 2023 to roughly 20% of data center revenue by the end of fiscal 2026. D’Antilio put it in sharp relief: “In Q3, it was about 10%. In Q4, it got closer to that 20% of our data center business” (“In Q3, it was about 10%. In Q4, it got closer to that 20% of our data center business” — Derek D'Antilio, Chief Financial Officer · 2026-05-07).

Why It Matters

This is not the company that reported two years ago. In fiscal 2026, automotive sales grew 17% with focused-auto (xEV + ADAS) up 30%, but it was the industrial side — led by data center and robotics — that delivered the upside. Management’s language has shifted accordingly. “We look at the long-term data center growth rate north of 20%... we expect FY ’27 to be well above a 20% growth rate” (“As we look ahead in FY ’27, we believe our growth rate will come in well above 20%” — Michael Doogue, President and Chief Executive Officer · 2026-05-07). That echoes their earlier framing from the January 2026 call: “We expect the business to grow at sort of a typical market rate with a CAGR north of 20%” (“We expect the business to grow at sort of a typical market rate with a CAGR north of 20%” — Michael Doogue, President and Chief Executive Officer (CEO) · 2026-01-29). The pivot is also showing up in margins and pricing power. The company’s gross margin recovered to 50% on a non-GAAP basis, up 140 basis points for the full fiscal year, despite gold being a 200-basis-point headwind. Management is now talking about select price increases to offset commodity costs, and they are targeting cost-downs from gold-to-copper conversion and factory efficiencies. On the GAAP data, the trajectory is visible as well: Gross margin has recovered 5.6pp year-over-year to 47% on a GAAP basis, but remains well below the 56% peak set three years ago. Revenue returned to $243 million — a level not seen since the cyclical high — though it is still 36% off the 2023 peak in real terms.

The Market’s Second Thoughts

Yet the tape is telling a more cautious story. Since the earnings call, shares of ALGM rallied sharply into late June — the recent 90-day line shows an up leg of about 60% over nine weeks — then reversed violently, leaving the stock in a -46.6% drawdown by August 21. The full history shows a similar pattern: up 29 weeks by +122%, then down six weeks by -32% off the June peak. In other words, the market initially rewarded the data center narrative, but now appears to be pricing in execution risk, competition, and the sustainability of that growth in a crowded AI-semiconductor field. There is also a macro backdrop working in the company’s favor: data center power and AI-infrastructure themes are appearing across this earnings season, from data center names to utilities and grid equipment makers. Allegro is riding that wave, but it is no longer a unique story. The differentiation now rests on execution — whether factory efficiency and share gain can convert design-wins and content-per-rack uplift into sustained margin expansion. The company exited the fiscal year with backlog at a multiyear high and design wins up over 30%, which is encouraging. But given the drawdown, investors are clearly asking: if the data center story is so good, why has the stock given back all of the post-earnings move?