In this episode of Motley Fool Hidden Gems Investing, Motley Fool contributors Jon Quast, Matt Frankel, and Lou Whiteman discuss:
- Lam Research's recurring services business.
- Advanced packaging 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.
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A full transcript is below.
This podcast was recorded on Oct. 22, 2026.
Jon Quast: 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, Jon 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 Lam Research. Know 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. Some of our listeners might be familiar with a company such as ASML, which really has a corner on its market. Lam 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. Really pulling back, but as we look at the most recent quarter here, revenue up 22%, gross margin has improved, operating margin, 40%. These are historically great numbers, maybe only expecting 15% in 2027 because of supply chain issues, but this isn't just a company providing the machinery, and I think 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.
Matt Frankel: Think of this more as a razor and blades model. You're talking about the services 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. The key takeaway for investors is that every tool that Lam sells creates years of service revenue. More tools running, the harder the tools are running, the more parts and upgrades are needed. It's the recurring steadier part of the business. Performance-based service contracts are going on with memory makers, so that’s nice; Lam is getting paid for uptime, not just making parts. The real key takeaway is that this is a razor and blades model and the blades are driving the growth right now.
Lou Whiteman: 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 $1 billion in sales ends up being $1 trillion program over time. There is something to that here where you don't just look at 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, 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.
Jon Quast: One of the things that Lam 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.
Matt Frankel: This is a case where it's good that we're not the gurus. We're good at explaining things in simple terms, which is 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. Think of it as building a skyscraper in layers instead of just one big single-story building. This is how AI chips and high bandwidth memory get their performance. And it helps Lam 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. This is growing very fast. Lam expects advanced packaging sales to grow by about 70% this year. As AI chips evolve, get more sophisticated, things like this should only increase. 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.
Jon Quast: To that point, Lam management here pointing out that spending for equipment, which is the big part of the Lam 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 alleviate some of those cyclicality concerns or is that still here?
Lou Whiteman: I think the concerns are still here, but it pushes them out, which is important. 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 stock is down from its high for the year. But look, there are natural limits to how fast they can grow to meet this demand. There are caps on how high growth can go despite demand. But again, this is where maybe some of the air coming out of valuation helps. 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 into 2028, you don't have to jump out of a pool now and head for the exits.
Jon Quast: 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?
Matt Frankel: It's tough to call it a value stock. On the bull side of it, it trades for roughly 22 times forward earnings right now. It's for a company that's growing earnings at a 75% rate and has a 40% operating margin, record cash flow. As Lou just said, visibility into at least 2028. On the bear 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 falling off, and supply constraints are capping the upside. Putting all that together, the stock is taking a pretty decent haircut on a revenue beat and good guidance; it’s a dip that I would nibble on, but I wouldn’t call it a value stock, but it’s definitely an interesting play right now.
Lou Whiteman: 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 this cycle. I think that Lam 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, 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.
Jon Quast: 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.
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Jon Quast: Welcome back to Motley Fool Hidden Gems Investing. Before we go further in our show today, I did want to say that Nvidia CEO Jensen Huang 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 for yourself at Agiready.fool.com. Again, that is Agiready.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. 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 disrupts the supply of that important element.
Matt Frankel: Helium is very important for a variety of applications. I mean, not just for the balloons that we buy for our kids’ birthday parties. Jon, I'm sure you've had small children. I'm sure you've had a helium tank around your house at one point or another.
Jon Quast: We have lost balloons to the sky, and there were many tears.
Matt Frankel: But in the AI infrastructure process, it plays a whole different role. In the chipmaking process, the fabrication facilities, they blow helium across the back of silicon wafers to keep temperatures precise during etching. Helium can be very supercooled. It helps a lot in the process. There's no good substitute for it is the big takeaway. 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 SK Hynix make their chips, for example. The spot helium price has cleared hundred dollar per thousand cubic feet. My next kids 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 small part of the cost of chipmaking. The chipmakers have pricing power right now, so they can afford it. It's other companies like say, research labs, medical research that need helium that are having a tougher time getting it and affording it right now. But it's a really interesting side market because we 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.
Jon Quast: It's so interesting too. The tie-in here from what we were talking about earlier is that a lot of Lam Research revenue comes from Asia markets in particular Korea. Korea is a country that is really dependent on the Qatar helium as opposed to helium from a different source. There is 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?
Lou Whiteman: Matt's right about helium, but as he says, helium is a small part of a lucrative process where companies have margins. That's not what's going on in the farms. 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 orders for this year's growing season were put in before the Iran war.
But, 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, I worry about the global economy. I worry about how that could ripple through the U.S. markets. 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 energy independence and other advantages. But I do think that the implications from all of this on the global Western economy are going to hit U.S. companies over time.
Jon Quast: 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?
Lou Whiteman: I'm more value hunting now than I have been. 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 frothy. That's 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 hard to see in the near term.
Matt Frankel: To 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. 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 Lou’s 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 looking for with a lot of cash on the sidelines.
Jon Quast: 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.
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Jon Quast: 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. Yet, Lou, it's maybe pointing to something that the rest of the market isn't really picking up on yet.
Lou Whiteman: I found, I guess, comments by CEO Arvind Krishna more interesting than the quarter itself. The quarter itself we can talk about. But look, Krishna basically said that customers are increasingly becoming focused on ROI, especially in AI. I don't think we should be surprised about this, but very blunt, basically blaming that for kind of some underwhelming results in the quarter. There's a million ways that you can explain this. It could be that IBM is just really bad at this, and it's just an IBM problem, but I don't think that is true. I think 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 in the way the hyperscalers are, the way Jensen Huang 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 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 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 the whole house the whole house of cards that this is all built on, potentially.
Jon Quast: Matt, what stood out to you in the quarter?
Matt Frankel: 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, 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.
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. Was this a case of fortunate deal timing or is this really just a normalization from Q2? 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. That scared investors a lot and it makes you 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 highly priced right now. 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 pivotal moment for them.
Jon Quast: I think it's important just to remember when it comes to a company such as Invidia 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 Claude 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. Man, starting to wonder where that limit is. Lou 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? 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 and consulting?
Lou Whiteman: Yes, that could happen. I don't think that's the only way it can go because on premise does have some just practical drawbacks too as far as just having, a lot of these things, if it's not core to my business, do I really want the headaches? 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 hyperscalars win, or companies see greater efficiencies. One of those there's inherent conflict between those three, and I think at some point it will resolve itself.
Matt Frankel: I think that if, the chip prices come down, things like that. It's a net positive for IBM on this. 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. 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 has been very focused on on-premise AI hardware, for example, but you would see some budget shift in that direction. But really, because a lot of companies need help deploying AI and that's what IBM does. They need help in that regard. But, 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.
Jon Quast: Final question. We're hit it really fast. IBM stock 21 times earnings. Matt, are you a buyer here?
Matt Frankel: 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.
Jon Quast: What of you, Lou?
Lou Whiteman: I've got better ways, I think, on quantum, and I'm not really interested in anything tech right now for reasons we talked about, so no.
Jon Quast: 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 Fool 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.
Jon Quast has positions in Micron Technology. Lou Whiteman has positions in ASML. Matt Frankel, CFP® has positions in International Business Machines and has the following options: long January 2029 $340 calls on International Business Machines and short January 2029 $370 calls on International Business Machines. The Motley Fool has positions in and recommends ASML, Applied Materials, International Business Machines, Lam Research, Micron Technology, and Nvidia. The Motley Fool has a disclosure policy.