Motley Fool Hidden Gems Investing - AI Expectations Hit a Fever Pitch

Episode Date: July 7, 2026

Every quarter recently, semiconductor stocks keep churning out incredible numbers. And every quarter, it seems as those companies somehow “miss expectations”. The most recent example was when Samsung Electronics reported a 1,900% increase in profits, the stock dropped so much it halted trading on the Korean composite index. Lou, Matt, and Tyler dig into the expectations game Wall Street is playing and the underlying trends still supporting it. Plus, defense companies are making moves at the NATO summit and investor questions. Have a question? Email us; [e-mail] Want to take the next step in your investing journey? Explore Motley Fool’s Epic for our portfolio-centered investing experience, premium research, tools, and guidance: fool.com/epic fool.com/epic Tyler Crowe, Matt Frankel, and Lou Whiteman discuss: - Samsung’s big profits and big stock drop - Amazon’s $25 billion debt deal - Lockheed Martin goes underwater - Are defense companies ready for the changing landscape? - Mailbag: How to navigate the Sunk Cost Fallacy? Companies discussed: SSLNF, MU, HXSCL, AMZN, GOOG, LMT, NOC, KTOS, AVAV, LHX, BOC, RKLB Host: Tyler Crowe Guests: Matt Frankel, Lou Whiteman Engineer: Dan Boyd Disclosure: Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, “TMF”) do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. We’re committed to transparency: All personal opinions in advertisements from Fools are their own. The product advertised in this episode was loaned to TMF and was returned after a test period or the product advertised in this episode was purchased by TMF. Advertiser has paid for the sponsorship of this episode. Learn more about your ad choices. Visit ⁠⁠megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crow, and today I'm joined by longtime Fool contributors, Lou Whiteman and Matt Frankel. We're going to talk about defense companies later in the show, talking about kind of some of the big moves that are happening in the industry lately, and as well as hitting letters or questions. But before we get started today, you know, hyperscalers, those builders of AI, they just keep spending more and more, and semiconductor companies are posting record results, but even that doesn't seem to satisfy the market. Samsung Electronics reported by what I think any measure would be a resoundingly successful quarter, but the stock dropped so much that it caused a circuit breaker

suspension of trading on the entire Korean composite stock price index today. Those losses have carried more or less over into the semiconductor space today, as many memory and processing chip manufacturers are down as of this morning. So guys, how on earth did we go from profits up 19 times compared to this time last year at Samsung to stop the entire Korean stock market? Yeah. So, I mean, a lot to unpack there. So a lot of these stocks were priced for not necessarily perfection, but to report blowout quarter after blowout quarter after blowout quarter. When you expect a blowout and you get, as you called it, a resounding successful quarter, it's enough to make the stock drop. We've seen this with several recent earnings reports and

not just in the memory space. And several of NVIDIA's reports look fantastic and the stock ends up falling. In Samsung's case, yes, you're right. They are expecting a roughly 19 times increase in quarterly operating profit, but that's being driven by AI memory demand. And investors seem to be questioning whether or not the AI memory chip rally has gotten ahead of itself. And it's not just Samsung. If you look at Micron, for example, even before today's, you know, kind of sympathy drop, it was down by about 30% since earnings. And that was just a couple of weeks ago. So the company also slightly missed revenue guidance. So it's not a flawless quarter. And there's also SK Hynix, U.S. listing that raised billions and billions of dollars of

capital. And that could be adding pressure as memory. There's just more memory stock supply in the market right now. I mean, the bottom line is, you're right, Samsung didn't have a bad quarter by any definition. But the amount of good news that has been priced into these stocks seems to have gone a little bit too far. Yeah, on the market, halting the market thing, it's important to note that two companies, SK Hynix and Samsung, make up about 53% of the Korean total market index. So this one company can halt the market kind of. But look, even with this, Samsung is up 150% to date. Others are up more. This seems 100% rational to me. The market is forward looking. We're always looking to the future. This is either going to last forever or it's not. And if it's not

going to last forever, at some point you should take profits. I think that's what we're seeing today. I don't think there's really too much to read into it more than that. I think investors are looking at the same world that I think the rest of us are and saying, look, this has been great. I don't know if it can go on forever. I'm going to look some gains. You know, the thing that's hard for me to also rationalize when we're talking about the expectations game of all of this is that even by most standards, this is looking like from a fundamental basis, like you look at the underlying numbers of like capital investment and all that stuff. It still looks incredible. It's almost hard to fathom that this can't meet the appetite of what Wall Street's expecting. I

I mean, Amazon earlier today announced it was raising about $25 billion in debt. And at very favorable rates, I mean, of course, it's Amazon. What else would you expect? I mean, this isn't the first company to do it either. I mean, Alphabet's tapped the debt and equity markets this year. And like nearly all hyperscalers from Alphabet to Amazon, Meta, you name it, they don't even raise an eyebrow or even like the CFO doesn't even seem to like lose a bit of sleep when they're increasing their annual capital spending budgets seemingly every quarter. So like, how do

we rationalize these wild stock moves? And what are we saying, playing the expectation games when the fundamentals still look surprisingly strong? Okay. Yeah. First of all, on Amazon, okay. For these big companies, the focus is always on cost of capital. You raise money at the most cost effect way you can. And as you said, they're getting very favorable rates here, 40 year money at less than 150 basis points above U.S. treasuries. That is a really, really good deal. Given their massive cash needs, forget AI. What about logistics, everything else? And given the cost here, they'd be crazy not to do this. So I don't think this really says anything other than they are a large company doing as they should. As to the bigger question, though, of like what's

going on here? Is it sustainable? Why is there this dissidence? I think and I got to credit Jeremy Grantham here, the very, very, very smart investor. This is his point, but it's such an important one. All of these companies, all of the Mag7, all of the hyperscalers, Amazon, Alphabet, all of them got to where they are by jumping into a niche and dominating it. The collective learned experience from this group of leaders is the pathway to success is to build your empire, claim your turf as quickly as possible. No one is backing down on AI in that scenario, especially since AI has been presented as the holy grail, the quest like no other. You are not going to back down unless you have no other choice. So are things getting out of hand?

Maybe, probably. But I really believe that these companies, it will continue until they can't. And the debt raise here is a reminder. There's still plenty of levers to pull. And so they will be continuing. Yeah. And I mean, just to throw some additional context behind that, I mean, this isn't just a $25 billion capital raise from Amazon. This is in addition to the $65 billion or so they've already raised this year through bond sales. I mean, that's so that's $90 billion from Amazon this year. Alphabet's raised about $85 billion in debt over the past year. And they might not be done. I mean, I saw one statistic that total hyperscaler bond sales are expected to reach about $300 billion this year versus $121 billion for last year. And Lou's right,

these terms are very favorable, especially for 40-year bonds. They serve that extra purpose of not only, you know, low-cost capital, but locking in the rate for decades, protecting from interest rate fluctuations. And I mean, the investor interest we're seeing, all of these deals that I just talked about, you know, the $85 billion in deals from Google, they've pretty much all been oversubscribed. So it shows that any further capital raises this year are likely to not be a problem. And both these companies still have very low leverage ratios, at least on paper. These are massive, massive companies. I mean, 0.4% to 0.7% debt to EBITDA ratios is what we're seeing here. The overall investment grade credit rated average is about three times debt to EBITDA.

So there's a lot of cushion here. At the same time, these are the first time these mega cap tech companies are really adding this type of debt to their balance sheets. So the question of whether or not it's sustainable, these AI investments are going to have to start generating high margin revenue at a pace that satisfies investors. And now that's vague for a reason. We don't know what that means, but that's what we're going to need to see here. Well, we'll keep playing the quarterly expectations game because we do have second quarter earnings coming up in the not too distant future here. Coming up after the break, we're going to do some movers and shakers in the defense industry.

So with the NATO summit happening this week in Ankara, Turkey, there's likely going to be a lot of defense-related announcements this week and in the coming days, because, you know, a bunch of CEOs get together, they start talking, you know, deals start to happen. And we got one of the first ones yesterday when Lockheed Martin announced it was acquiring Sonar Specialist, its private company, Ultramaritime, for $3.45 billion. Now, I get that this on a Lockheed scale thing is a relatively small deal, but does this change the company's standing in the industry at all? Correct me if I'm wrong, Lou, but I think Lockheed is trying to diversify its portfolio, not be quite as reliant on the F-35 fighter, which has been kind of their flagship platform for a while.

Yeah. So Lockheed Martin is arguably the most diversified portfolio in the sector, but the F-35 is still a lot of it, about 30% of annual revenue. Lockheed does helicopters. They do missiles, missile defense, sensors, space. So they do a lot of things. And a lot of those capabilities, especially in areas like sensors and electronics, came via acquisitions.

The primes have a long history of augmenting their R&D with Bolton deals. That's part of the trend here. This is an area where Lockheed isn't as strong as maybe some other players. It is an area of interest among many other things. But so it fits well in the overall trend. But I don't think this is really a statement deal as much as it is opportunistic. So, Lou, when you talk about bolt on deals, and this is something I think I've seen you write about for, I don't know, probably like the past 10 years, is the idea of like there's

only so much acquisition that like the companies like Lockheed can do because it's a pretty consolidated industry when it comes to like the defense primes. And, you know, there's certainly no place where, I don't know, Lockheed and RTX can join forces these days. Right. Yeah. And nor did I want to really. But yeah, I think the way to think of this isn't necessarily it's hard to add platforms. Lockheed did it when they bought Sikorsky. So there are some opportunities there. But in that case, the seller just wanted out. So the Pentagon needed to get a good home for the helicopter business. What you are buying here is the R&D. What you are buying is access to technologies, kind of access to the supply chains more than you are new platforms. And that's

where you see most of the prime deals happening. And Matt, just for some context here, like Lou was talking about helicopters, space, aeronautics and stuff like that. You know, he didn't mention as much about submarines and sonar. So in terms of like Lockheed, where does this kind of position them a little bit? Is this moving into new territory here? Yeah, I mean, so you're right in the sense that this is a very small deal in the overall business. It's less than 5% of Lockheed's total annual revenue. It does significantly grow the position in anti-submarine warfare. And that's really an area of defense where we're seeing global demand rising right now. Undersea deterrence is a big priority of U.S., NATO in response to what's going on

overseas and in the conflicts we're seeing. Yeah, certainly anything that can be tied to intelligence sensors seeking stuff like that versus metal bending seems to be the trend here. And that's one of the things I found most intriguing about this ultra-maritime deal is I think it hits at one of the lesser discussed stories in the defense industry. And that's the changing priorities for defense funding. One thing that has become abundantly clear in conflicts this decade, whether it be Iran, Ukraine, elsewhere, is the emergence of small cheap single-use drones that are very very effective against much much more expensive equipment and i in this is this trend like a complete game changer of the industry i i mean

i certainly think though or it you know what do you guys say is it that or just like a supplemental add-on because the way i see it drones and smaller equipment doesn't require like the massive supply chains and coordinated efforts to build the f-35 or a gigantic aircraft carrier or something like that. You know, the things that Lockheed, Northrop Grumman, and the other defense prime contractors have specialized in for decades is taking 27 different subcontractors, pulling them all together and doing something epically large. Single-use drones, I don't know, 15, 25 pounds, couple explosives, and a remote control. It seems to really change the way we're doing things here. Yeah, well, I mean, the emphasis on cheap single-use drones, it's a clear shift in defense

budgets. It's happening alongside the traditional contract model, not necessarily replacing it. It's a big line item in the Pentagon's budget right now, but the traditional line items have mostly increased as well. I mean, the Department of Warhead, they have their drone dominance program that aims to buy hundreds of thousands of small attack drones, but they kind of consider them consumable supplies, not as durable equipment. So the Pentagon's ordered about 22,000 of these. So that's, you know, it's not a small order and production is just ramping up, but these are different tools for different jobs compared to like fighter jets submarines and missile systems so there is some supply chain simplification but i think if you look at some of these big companies

like aero environment or kratos you will see that there is still pretty complex supply chains these are at the end of the day systems integrators and you still need to do that work it's just at a different scale the issue as an investor as a you know the business story with these low-cost drones is what makes them intriguing to defense planners makes them, I think, less intriguing for investors, the cost. You really have to make it up on volume here. The bigger trend, though, Tyler, and you mentioned this kind of to move away from metal bending. The big trend here is the same trend you see in every other industry, digitalization. The value is shifting from just the people who make the big objects to the ones that make them smart, the electronics. That's the

story behind the emergence of L3 Harris. That's the story of Lockheed wanting to buy Ultra Maritime. This will continue. All right. The thing is, and a real big trend here as far as whether it replaces the primes, I think it actually ends up working for them. The middle market is brutal for defense contractors. There is almost not a middle market. It just gets consolidated out of business because it's a tough business to survive. The biggest competitive advantage the primes have is their ability to work on the timetable and communicate with the Pentagon. That is hard for especially a Silicon Valley startup to learn. Most of these companies will not be independent in five to 10 years. The successful ones, there might be one or two new companies that come out

of it. Most of them will be part of bigger portfolios, less successful ones will be sold for parts. But I think this is just continuing a 20 or 30 year story in just looking to smarter rather than just powerful, big mammoth equipment. To the portfolio shuffling, moving around thing, just an anecdote. And it kind of speaks to that industry in general. I have an uncle that works on basically sonar electronics for the Navy.

And that particular project has, I think, moved to five different defense primes at any given time. And it really shows like, you know, the hot potato nature that, you know, one one moment it could be a part of one portfolio could be part of the other there seems to be a lot of shuffling around and optimization of assets and it wouldn't be surprising to see a lot of like you said the smaller middle market people either getting gobbled up or sold off for parts and you know we'll take a little bit of this here and then sell off the rest the one i think

interesting thing too here because you have so many companies even there's one that's really popular in underwater uncrewed vehicles. Lockheed sort of just put a valuation multiple on these. They're paying about four times sales for Altra, which I think it's interesting now as an investor to compare that to some of the public company valuations out there. May suggest that a lot of the future growth is priced in. I feel like you want to name a company here. Do you want to name a chain? No, there's a lot of them. Let's just leave it at that. I think as an investor, you should always look at the comms though. Coming up after the break, we're going to hit some podcast questions. Hey everyone, quick reminder, if you want to get your question read on air, go ahead

and email us at podcasts at fool.com. That's podcasts with an S at fool.com. Just remember, keep it foolish, keep it short, and don't ask for any kind of personalized advice because we certainly can't do that without getting in trouble. So today's question comes from Lisa. And the question is, I just heard about the sunk cost fallacy. I'm a new investor to individual stocks and I've been holding onto some stocks that have had significant losses.

I've also been looking at some stocks with huge gains in my portfolio and wonder what point do investors reinvest in companies that could gain money instead of lose it. So far, I haven't sold for loss and I feel like I'd be opening up a can of worms for myself mentally.

Thank you for the awesome advice. I listen to your podcast daily. Thank you, Lisa, for the kind words. And Matt, before you give your answer to Lisa's question, why don't you just give us a quick refresher on sunk cost fallacy for anybody who may not necessarily be as aware of it? Yeah, so the sunk cost fallacy,

it refers to letting money or effort that you've already spent influence a forward-looking decision. So to put that in the context of what we're doing here, what you originally paid for a stock has nothing to do with whether or not it's a good investment today. Lou bought Rocket Lab for $3 a share.

That has nothing to do with whether or not it's a good investment at the current price. So only the current state of the business and its future growth prospects do. So psychologically, making a loss real by selling it is a tough hurdle to overcome. Honestly, it's probably why I held on to Boston Omaha for two years longer than Tyler said I should have. It essentially serves to confirm a decision didn't work out the way you wanted to, which can be difficult to accept. So try asking yourself this question. if you had cash today instead of these shares of stock, would you choose to buy that exact stock at today's price? If the answer is no, it's probably a sign that you should go ahead and

move on. Remember that selling today doesn't mean that your original decision was wrong. It just means that the stock is no longer a good investment right now. It could 100% be the right move when it's based on today's information. Kind of similar answer. You know, for me, it's always I try and focus on the reasons I bought in the first place and ask myself if they're still valid. If anything, time just gives you added data, you know, so you can maybe make a more informed decision. But if the reasons are still valid, whether it's up big or down big, I try and hold on. If they're not, then yeah, I probably should sell. It's possible my original reasons to buy were wrong if something's way down. So I think you, again, the additional time gives

you data you should reassess. But I don't personally let performance drive my buy and decisions. Most stocks I'm buying, I'm hoping to hold for a long time, in decades, not quarters. So if things haven't worked out in a year or so, say, that isn't necessarily a reason to believe it can't work out long term. But you'd be crazy not to at least reassess and look at what has happened since you bought. Yeah, this is a really relevant sort of question, too, for a lot of people because we've seen recently a single stock investing has been quite volatile relative to times we've ever seen. We were just talking about at the top of the show, big moves in semiconductor stocks that are moving hundreds of billions of dollars in any given day.

So it can be extremely challenging to separate the business case, which I think for most of us is the thesis that you buy a stock versus the price machinations in any given moment, the valuation. And that can be a hard bridge for a lot of people to cross or, you know, get over when it comes to investing is understanding, you know, have the business fundamentals of why I bought this business still maintain and is what I'm seeing today more valuation related than it is related to actual deterioration of business or a management change or something that, you know, may materially change the trajectory of the business. So as you're thinking through these things. Trying to find that separation of is it stock valuation related or is it business change

related? And finding the difference between those two can really help you make those sort of decisions. As always, people in the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based only on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks for producer Dan Boyd and the rest of the Molecule team. From Lou, Matt, myself, thanks for listening, and we'll chat again soon.