Motley Fool Hidden Gems Investing - Did IBM Just Tell the Truth About AI?

Episode Date: October 22, 2026

Lam Research is a semiconductor machine business that’s breaking records, but its stock price has been cut nearly in half from highs in 2026. Jon, Matt, and Lou talk about historical cyclicality as well as present strengths before giving their opinions of whether it’s a good stock to buy right now. The team also discusses how the Iran conflict impacts some under-appreciated things in the economy before closing with IBM’s unique perspective on the state of the AI market. Jon Quast, Matt Frankel, and Lou Whiteman discuss: -Lam Research’s recurring services business -Advanced packing in the semiconductor industry and why it matters -The helium shortage -Rising agricultural costs -IBM’s unique take on AI spending -What could boost IBM’s business Companies discussed: Lam Research (LRCX), ASML (ASML), Applied Materials (AMAT), Nvidia (NVDA), Micron (MU), Samsung, SK Hynix (SKHY), IBM (IBM) Host: Jon Quast 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

Revenue is up, but stocks are down. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm your host today, John Quast. I'm joined by Lou Whiteman and Matt Frankel. Today we're going to talk about why the stock market is down big here as we tape, and also we're going to talk about results from IBM. But first we want to start by talking about lamb research.

No, this is not a company that is researching sheep out in the field. this is a company that provides critical machinery for the semiconductor industry. Now, some of our listeners might be familiar with a company such as ASML, which really kind of has the corner on its market. Lamb Research does have some competition when it comes to the machinery that it provides, but it just reported its quarterly results. It's down about 9% as we tape, and it's actually down about 45% from its 2026 high. So really pulling back, but as we look at the most recent quarter here, revenue

up 22%, gross margin is improved, operating margin, 40%. These are historically great numbers, maybe only expecting 15% in 2027 because of supply chain issues. But Matt, this isn't just a company providing the machinery. And I think that that's the part of the business that investors are most familiar with, but it has a more recurring part of the business as well. Yeah, think of this more as a razor and blades model. So you're talking about the server side of the business. The customer support business group, they do spares, upgrades, they provide service contracts. That did $2.5 billion of sales. It was up 40%. That's the fourth straight record quarter for the service business. They expect it to grow by about 30% this year. That's

more than twice the company's long-term target. And the kind of key takeaway for investors is that every tool that Lamb sells creates years of service revenue. So more tools running, the harder the tools are running, the more parts and upgrades are needing. It's the recurring kind of steadier part of the business. I mean, performance-based service contracts are going on with memory makers, so that's nice. So, they're lambs getting paid for uptime, not just making parts. And I mean, the real kind of key takeaway is that this is a razor and blades model, and the blades are the driving the growth right now. It really reminds me of aerospace in all the best ways. And I know that's not what tech investors want to hear. But I mean, look, some of these big programs, it's a billion dollars in sales, ends up being a trillion dollar program over time.

And there is something to that here where you don't just look at, you know, what they're selling today, but what that means rippling through the system. That's so important given the heightened demand that this is a cyclical business. I think it's so, it, this is, the services side of it is the way you can see past the bubble if there is indeed a bubble. and it should help investors to stay in the stock even when things get elevated, I would think. One of the things that Lamb Research here pointing out as a long-term driver for its business is really this thing called advanced packaging. And not that we are the so-called gurus when it comes to semiconductor investing, but I thought that it would be beneficial for our listeners just to look into what is advanced packaging, Matt? Well, this is the case where it's good that we're not the gurus. We're good at explaining things in simple terms, which is kind of what you need with something like this. I don't want to give

a graduate level dissertation on what advanced packaging is, but in simple words, instead of making one giant chip, you stack and connect multiple chips together. So think of it as like building a skyscraper in layers instead of just one big single story building. So this is how AI chips and high bandwidth memory get their performance. And it helps Lamb because stacking chips like this requires a lot of etching, which is a fancy word for just drilling little holes through silicon, and deposition, which is laying down those copper connections that you see on all the little chip designs.

So this is growing very fast. Lam expects advanced packaging sales to grow by about 70% this year. And as AI chips evolve, get more sophisticated, things like this should only increase. So it's a big part of the business. It's important to know what it is, and it's important to know that it's a big growth driver. And to that point, Lamb management here pointing out that spending for equipment, which is kind of the big part of the lamb business and other players such as applied materials, but seeing this equipment spend going from around $150 billion to maybe over $200 billion next year,

Lou, I'm curious, does this kind of alleviate some of those cyclicality concerns, or is that still here? I think the concerns are still here, but it pushes them out, which is important. I mean, look, cycles happen, but they don't have to happen overnight, and you can, as an investor, make money off the cycle if you can have visibility of how far it will go. What I see here more is a risk, and I think the risk is, you know, the stock is down from its highs for the year. But look, there are natural limits to how fast they can grow to meet this demand. So there are, let's just caps on how high growth can go despite demand. But again, this is where maybe some of the air coming out of evaluation helps. And yes, if you're dealing with a cyclical industry, and I think this is a cyclical industry,

you want visibility for how long the up cycle will last. What management is telling us right now is that it's safe to swim, at least in the 28, you don't have to jump out at a pool now and head for the exits. Well, I'm glad that you brought up valuation because I did want to bring that up here. Now that it is down, it's trading at a price to earnings ratio of about 35. I don't know. Do either of you see this as a potentially good value stock here, or is this something that you're still avoiding?

It's tough to call it a value stock. So on the both side of it, I mean, it trades for roughly 22 times forward earn. earnings right now. And it's for a company that's growing earnings at a 75% rate and has a 40% operating margin, record cash flow. And as Lou just said, visibility into at least 2028. On the bare side, equipment stocks are historically cyclical. I don't know what peak margin is, but you're definitely probably close to it right now. The China business is kind of falling off and supply constraints are capping the upside. So, I mean, putting all that together with the stock taking a pretty decent haircut on a revenue

beat and good guidance, it's a dip that I would nibble on. But it's, I wouldn't call it a value stock, but it's definitely an interesting play right now. And I think this is where it's really hard to be an investor because I don't think, I already said, I don't think it's time to sell on the. cycle. I think that Lamb can sustain for now. But again, Wall Street pays for growth. Wall Street is attracted to growth. Wall Street isn't attracted to the status quo. It's getting closer to a buy as the stock comes down, but I don't know what the upside for the shares are in this cycle, even if I think the downside is better protected than it was. You are getting a discount to its peers, if you want to call

them that, companies like Applied Materials, you mentioned ASML, just kind of other companies in this manufacturing of silicon area. I think right now we're at a point where the cyclicality is less scary, but the upside is a question. For me, I'm going to be stubborn and wait and see if I can't get a better deal and maybe a little more growth up ahead if these trends continue. Well, when we come back, we're going to be talking about why the stock market was down big today. You're listening to Motley Fool Hidden Gems investing. The new Subaru Cross Trek Hybrid is the most fuel-efficient cross-track yet. That means less time filling your tank and more time filling your day.

More court time. More ride time. More lake time. More camp time. More go time. The new 2027 Subaru Cross-Trek hybrid. Consumer Reports top-rated subcompact SUV. Stop by your local Subaru dealership or visit Subaru.ca to learn more. Consumer Reports does not indoors products or services. Welcome aboard via rail. Please sit and enjoy. Please sit and stretch. Steep. Flip.

Or that. And enjoy. Via rail, love the way. Welcome back to Motley Fool, Hidden Gems Investing. You know, before we go further in our show today, I did want to say that NVIDIA CEO Jensen Wong recently said that AGI has arrived and Motley Fool CEO Tom Gardner agrees with that, and that's why he's hosting an upcoming AGI summit. It's 100% free for all fools to attend, RSVP it for yourself, at AGIReady.

DotFool.com. Again, that is AGIReady. Dot fool.com. It's 100% free, so go ahead and sign up today. As we tape this, the stock market is in the red today, and it's due to some comments from President Trump implying that the Iran conflict is going to pick back up again in intensity after the midterm elections here in a couple of weeks. The market obviously does not like that.

And there are many reasons why. But one of the ones that we wanted to talk about today is something that a lot of people may not realize. One, they may not realize how important helium is to our economy. And they may not understand how the Iran conflict really does. disrupts the supply of that important element. Yeah, I mean, helium is very important for a variety of applications. I mean, not just for the balloons that we buy for our kids' birthday parties.

John, I'm sure you've had a, you have small children. I'm sure you've had a helium tank around your house at one point or another. Yeah, and we have lost balloons to the sky, and there were many tiers. But in the AI infrastructure process, it plays a whole different role. So in the chipmaking process, the fabricating process, the fabricating, facilities, they blow helium across the back of silicon wafers to keep temperatures precise during etching. Helium can be very, very super-cooled. It helps a lot in the process. There's no good substitute for it, is the big takeaway. So a lot of countries, we make a lot of it

here, but South Korea, for example, gets about 65% of its helium from Qatar, and that's where Samsung and S.K. Heinex make their chips, for example. So the spot helium price has cleared $1,000 per 1,000 cubic feet. So my next kid's birthday party is going to be more expensive. And that's several times the normal level. It's got big implications for chip production. It hasn't hit the cost yet because it's one, that's still a very, very small part of the cost of chip making.

So the chip makers have, and chipmakers have pricing power right now so they can afford it. it's other companies like, say, research labs, you know, medical research that need helium, that are having a tougher time getting it and affording it right now. But it's a really interesting kind of side market, because we know, you know, diesel prices are high. We know that a lot of things are high because of the Iran War. Helium wasn't on my bingo card, but maybe it should have been.

Yeah, it's so interesting too. And the tie in here from what we were talking about earlier is that a lot of lamb research revenue, comes from Asia markets, in particular Korea, and Korea is a country that is really dependent on the Qatar helium, as opposed to helium from a different source. So there is an interesting follow-through there to look at. But Lou, there's something that has your attention more than the helium market and the potential disruption there. What are you concerned with? Right. Yeah. You know, Matt's right about helium, but as he says, helium's a small part of a lucrative process where companies have margins.

that's not what's going on in the farms. A lot of what a lot of our fertilizer stock for the globe goes through the Gulf in normal times. On average, guys, fertilizer prices in the U.S. alone are up 20% over the start of the year. That's 20% more the farms have to pay. This matters because we are entering the time period right now where you book your fertilizer order for next spring for the growing season. We really haven't felt the effect yet because most of the time. of the orders for this year's growing season were put in before the Iran war. But you know,

you couple that with the diesel prices. And the crisis on the farm is only going to accelerate. It's almost baked in that 2027 is going to be a terrible year for farming. This is worse outside of the U.S. than it is in the U.S., which is, you know, I worry about the global economy. I worry about how that could ripple through the U.S. markets. And I just worry about sort of crisis in some. We're already seeing basically an affordability crisis in France blowing up in a very big way. I think the biggest risk out of this, it isn't oil, it isn't like one commodity. It's just a growing headwind on the world economy that can end up, even if the U.S. is more insulated from it, and I think we are thanks to our kind of energy independence and other advantages.

But I do think that the implications from all of this on the global West. economy are going to hit U.S. companies over time. Is there anything that you're changing in your financial process, your investing process to reflect some of these fears in the market or the risks to the economy? I am more value hunting now than I have been because I do think that, I don't think it's going to be immediate, but I think 2027 is going to be a slog. And I don't necessarily want to be out ahead of growth stocks. I know it's terrible the time to market.

so I'm not really exiting positions that are kind of frothy. That's kind of my hedge. But as far as where new money is going, I am getting more conservative by the month on where I'm deploying. I'm really looking for values here because I think the next leg higher is really, really hard to see in the near term. Yeah. I mean, to kind of add just a sentence or two to that, it's especially true at a time when I can just park my money on the sidelines and earn 5%. That also plays into my math there. You know, when, you know, three years ago, when my savings account was paying 0.1%,

it was a lot tougher to justify having a lot of capital just sitting on the sidelines. But now it's a lot easier to do and lose right. I see the next leg up in the AI trade as existing, but being a lot more selective in very companies like winner-specific than the first wave. And that's what I'm kind of looking for with a lot of cash. the sidelines. Yeah, I may need to start rethinking that cash on the sideline strategy in a way I haven't before.

When we come back, we are going to talk about IBM and its potential truth-telling. You're listening to Motley Fool Hidden Gems Investing. The new Subaru Cross-Trek hybrid is the most fuel-efficient cross-trek yet. That means less time filling your tank and more time filling your day. More court time. More ride time. More lake time. More camp time.

More go time. The new 2027 Subaru Cross Trek Hybrid. Consumer Reports top-rated subcompact SUV. Stop by your local Subaru dealership or visit Subaru.ca to learn more. Consumer Reports does not endorse products or services. Welcome aboard via rail. Please sit and enjoy. Please sit and stretch.

Steep. Flip. Or that. And enjoy. Via rail. the way. Welcome back to Motley Fool Hidden Gems Investing. We wanted to close out the show today with financial results from IBM. The company just reported in the last 24 hours. The stock was down slightly as of this taping down 25% year to date. Of course, this is the enterprise software consulting

business. It beat expectations with 5% revenue growth. On profits, it delivered strong results, 7.8 billion in free cash flow. And yet, Lou, it's maybe pointing to something that the rest of the market isn't really picking up on yet. Well, yeah, this is, I found the, I guess, comments by CEO Arvin Krishna more interesting than the quarter itself, the quarter itself we can talk about. But look, Krishna basically said that customers are increasingly being, becoming focused on ROI. And I don't think we should be, especially in AI, and I don't think we should be surprised about this, but very blunt and basically blaming that for kind of some underwhelming results in the quarter. Now, there's a million ways that you can explain this. It could be that IBM is just

really, really bad at this and, you know, it's just an IBM problem, but I don't think that is true. I think that, that Krishna's comments are correct and that there is more pushback on pricing in the enterprise market and more just questioning what exactly are we getting for our investment than there was, say, six months ago. My sense is that IBM is uniquely positioned to tell the truth here. They are not all in the way the hyperscalers are, the way Jensen Wong and Nvidia is, all of these people telling us, don't worry about it. Demand is unlimited. IBM is sort of at a different part in the business where they can be more honest. We don't know for sure that's going on, but I think that as a, you know, focusing on the bigger picture, we need to at least consider if he's correct and what that

means for all of our assumptions about these companies basically charging their way to an ROI or kind of unlimited demand, unlimited pricing power, and how it ripples down to demand for data centers and demand for all of these picks and shovels to kind of the whole, the whole house that these, the whole house of cards that this is all built on, but potentially. Yeah, Matt, what stood out to you in the quarter? Well, I want to take you back to the second quarter because after IBM's second quarter, and this goes to what Lou said about telling the truth, this IBM stock took a big hit. The biggest worry in the second quarter was that the most lucrative parts of the business, the software business, for example, is the big reason they beat revenue expectations this quarter, were more discretionary than people had feared.

There's not unlimited demand. It has to be focused. For example, because of high memory chip prices, some of IBM's customers were delaying their spending on consulting services in the second quarter, and that caused them to miss expectations. So Q3, especially when it comes to the software side of the business, consulting was still flat. That's still a worry spot. But the software business especially helped calm investors' fears on that front. It was even brought up on the conference call, Is this a case of fortunate deal timing, or is this really just kind of a normalization from Q2? So software handily beat expectations. It's the highest margin, the stickiest part of the business.

It was a real rebound. So software bounced back. But the big thing that I noticed, and this is true with a lot of companies that have reported so far and in the second quarter, is that IBM beat expectations for the third quarter, like you mentioned, but did not raise their full year guidance. when you beat expectations in a third quarter and keep your guidance flat, you're implying that the fourth quarter is going to be weak. That's just how the math works. So that scared investors a lot, and it makes you kind of think that the revenue is a little bit

lumpy because customers are choosing when is an opportune time to spend money on consulting services, on software services, and when they should focus that elsewhere in the AI trade on memory chips because they're at a shortage and they're, you know, have highly priced right now. So it was a solid quarter. They did what they needed to do. I'm more confident in IBM's strategy over the next year or two than I was before the report. But the fourth quarter is definitely going to be a kind of pivotal moment for them. Yeah, and I think it's important just to remember when it comes to a company such as Nvidia or even Micron at the moment, these are companies that have basically unlimited resources at this point.

Not so with all of the enterprises that are out there. There are limited resources, your cost for, let's say that you are deploying a clod or an open AI into your enterprise workflows and you're paying for those tokens. I mean, at some point, the memory prices, everything is adding up and there has to be a limit to your budget somewhere. And, man, starting to wonder where that limit is. Lou's saying maybe they're telling the truth here more than other companies. maybe things are slowing down in the AI industry. Humor me for just a minute. Let's assume that these semiconductor companies

are about to oversupply the market with hardware and that drops down hardware prices. Could that actually lead to a higher deployment of on-premise AI? So this would be AI stack at your place of business. And would that actually be a tailwind for IBM's business since it is so big in consulting? Yes, that could happen.

I don't think that's the only way it can, go because on premise does have some just kind of practical drawbacks, too, as far as just having, you know, a lot of these things, if it's not core to my business, do I really want the headaches? And, you know, that's going to be an individual decision. I think that's possible. I do think that this whole bull case has three parts to it, and it feels like increasingly the three parts. One of them has to be wrong.

Either the picks and shovels win, the hyperselers win, or companies see greater efficiencies. One of those, there's an inherent conflict between those three, and I think at some point it will resolve itself. Yeah, I mean, I agree. I think that if, you know, come up, the chip prices come down, things like that, it's a net positive for IBM on this. You know, I, IBM relies on customers having budget for things like AI consulting, which has been flat because they have to shift a lot of their budget elsewhere. So if you have to shift less of your budget toward memory and things like that, I'm not sure if on-premise AI would skyrocket in that case. It's definitely been a trend. Qualcomm's been very focused on on-premise AI hardware, for example. But you would see

some budget shift in that direction. But really, you would see, because a lot of companies need help deploying AI, and that's what IBM does. They need help in that regard. But you know, you have to spend money on the memory first. If you don't have to spend as much money on the chips and things like that, you could shift a lot more money back toward companies like IBM. Final question. We're hit it really fast. IBM stock, 21 times earnings. Matt, are you a buyer here? Yes. I think IBM has a lot of hidden value and I consider it my best call option on the quantum computing trend. I've called it that a few times. I've got better ways I think on quantum and I'm not really in anything tech right now for reasons we talked about, so no.

Well, there you have it. As always, people on 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 solely 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 to our producer Dan Boyd and the rest of the Motley Fool team for Matt Lou and myself. Thank you so much for listening to our show today and we will see you again next time.