RBC Capital Markets has started covering Allegro MicroSystems, a Massachusetts-based chipmaker, with an outperform rating, signaling confidence that the company's data center business can keep growing even as the industry's hardware mix shifts. The bank's analysts expect Allegro's data center revenue to more than double by fiscal 2027, driven by the rising power demands of artificial intelligence servers.
Why the data center story still holds
Allegro makes specialized chips that manage and measure electrical current. These are often called "plumbing" chips because they help move and monitor electricity through a system. In a data center, they play a critical role in ensuring that power is distributed efficiently and safely.
RBC's thesis is that AI data centers are becoming more power-hungry, so these chips matter more, not less. As AI racks—the frames that hold servers and networking gear—need higher-power designs, they require more components per rack. That means more of Allegro's chips per installation, even if the overall number of racks grows at a slower pace.
One key product category is high-speed current sensors. These sensors tell servers and power systems exactly how much electricity is flowing, which is essential for managing the intense power loads that AI workloads demand. RBC believes these sensors will be a major growth driver for Allegro.
What this means for investors
For everyday investors, the takeaway is that the AI boom isn't just about the big names like Nvidia or the cloud giants. It also creates opportunities for smaller suppliers that make the components enabling AI infrastructure. Allegro is one of those suppliers, and RBC's rating suggests the bank sees a favorable risk-reward balance.
However, it's important to remember that an analyst rating is just one opinion. The stock could still be affected by broader market trends, competition, or execution risks. Investors should consider their own research and risk tolerance before making any decisions.
The broader context is that data center construction is booming, with companies like AWS pledging billions for power and water to support new facilities. This trend is also showing up in the bond market, where AI data center bond issuance is pushing up long-term yields, according to ING. And the appetite for data center investments is global, as seen in Firmus's recent ASX IPO.
Allegro's position in the chip market
Allegro MicroSystems is a well-known player in the analog and mixed-signal chip space, with a strong presence in automotive and industrial markets. The company has been expanding its data center exposure, which is now a key growth area. While the automotive market has been cyclical, data center demand is providing a new tailwind.
RBC's coverage initiation is a positive signal, but it's not a guarantee. The company faces competition from other chipmakers, and the pace of AI adoption could vary. Still, the bank's expectation of more than doubling data center revenue by fiscal 2027 suggests a strong growth trajectory.
What to watch next
Investors will be watching Allegro's quarterly earnings for signs that data center revenue is indeed accelerating. They'll also look at the company's guidance for future quarters. Additionally, the broader market's reaction to AI-related stocks and any changes in data center spending will be relevant.
For those interested in the data center theme, it's worth noting that Alibaba is in early talks with Solaria to power a Spanish data center with renewables, highlighting the intersection of data centers and energy. And the dollar's movement ahead of the US jobs report could affect global markets, including tech stocks.
In summary, RBC's bullish stance on Allegro underscores the idea that the AI infrastructure buildout is still in its early innings. For investors, it's a reminder that opportunities exist beyond the biggest names, but also that such bets carry their own risks.
