Why Globalfoundries Rallied Today

Shares of semiconductor foundry Globalfoundries (NASDAQ: GFS) rallied 12.1% on Wednesday, as of 1:32 p.m. ET.

The company, a leading manufacturer of specialty semiconductors that are often made using less-advanced "trailing edge" nodes, reported its third-quarter results Tuesday evening. While Globalfoundries' overall revenue declined, it was ahead of expectations, and management's guidance was also better than expected, perhaps indicating a bottom in the cycle.

Sales of smartphone chips pick up as other industrial chips languish

The trailing-edge semiconductor space has been in a bear market for just about the past one to two years, after the pandemic period's shortages of industrial chips turned into a glut.

In the third quarter, Globalfoundries saw a 6% year-over-year revenue decline to $1.74 billion, with adjusted (non-IFRS) earnings per share down by 25% to $0.41. Yet those numbers also beat expectations. Further, Q3 marked the second straight quarter of sequential growth for Globalfoundries after revenues bottomed out in the first quarter of 2024.

While communications infrastructure, Internet of Things, and automotive chips still all posted sales declines, sales of chips for smartphones -- Globalfoundries' largest end-market, accounting for 50% of revenue -- increased by 14% sequentially and 11% year over year.

More importantly for investors, management also guided for sequential growth in the fourth quarter, with a forecast of $1.80 billion to $1.85 billion in revenue, compared to analysts' consensus expectations of $1.80 billion.

Are industrial chips set to recover?

Part of the reason Globalfoundries popped so much in response to the Q3 report was the fact that the stock has up to this point had a fairly dismal year. It's down 32%, even after Wednesday's bounce.

Industrial and trailing-edge chips have been in a long downturn, but remember, the semiconductor market is cyclical. Therefore, Globalfoundries stock may be worth a look for those who believe the next upcycle may be right around the corner.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.