Big Banks Cash In, IBM Crashes Out

0:01Big banks are loving this market. Today, I'm Motley Fool Hidden Gems Investing.

0:12welcome to molly fool hidden gems investing i'm your host tyler crow and today i'm joined by longtime full contributors lou whitman and matt frankel as i kind of hinted with the intro we're going to get into the blockbuster quarter that just about every bank had that reported today and it was pretty much anybody that is a major bank in the united states uh reported today and It looked fantastic. We're also going to get into some reader emails. But first, we're going to start with the big kind of news moment of the day. And that is shares of IBM are down 26 % as we are taping this show after the company issued preliminary results for the upcoming quarter that really were not in line with analyst expectations.

0:53Now, Lou, this was a big drop. I saw a Bloomberg headline earlier before we got on. It was the biggest drop since, I think, 1968. for the stock more than Black Monday in 1987. So what was this big drop for what it seemed to me was a relatively modest revision to what we're seeing? There had to have been more to the story here, right? Yeah, I think there is. As you say, this isn't the full earnings release. This is preliminary. IBM, basically all they warned is revenue is going to come in about$17.2 billion, short of$17.9 billion. It's not a huge amount. I think what triggered the sell-off is kind of of the reasoning given.

1:32CEO Arvind Krishnas said, last few weeks of June, IBM saw clients shift CapEx towards hardware servers, memory storage away from big blue. That's probably not just a last two weeks at a quarter thing. Given the way the stock had traded up, I think that this is a head for the exit, sell the news sort of a move. Yeah. Something in the difference of a$700 million dollar change in revenue. Yeah, the number sounds big. But again, if we're talking about 17 billion, give or take a few hundred million, that's not a big deal. Now, Matt, the three of us did a live event for The Motley Fool back in San Diego a few months ago.

2:13And you made the case for IBM stock as one of your top picks right now. Now, I'm not trying to put you on full blast here because the stock is down and, you know, let's all make fun of Matt. But does anything that announced today alter your thinking here? Like we said, this isn't a huge revision, but there seems to be some other stuff going on here. Yes. I mean, so first of all, I welcome being called out when I make a public call on a stock like this and then, you know, something like today happens. As Lou said, the numbers themselves weren't too awful. I mean, that, you know, 17.2 billion versus 17.9 billion, that's not worthy of a 26 % drop all by itself.

2:50But there is more to the story. I mean, earnings per share came in at 293 versus expectations of 302, not worthy of a 26 % drop. This would be IBM's worth single day ever, by the way. The previous biggest one-day drop they had was Black Monday in 1987, and this would exceed that. So the question that seems to be on investors' mind, and the one that is more worthy of the drop we're seeing, is if the shift towards spending more on things like memory and other hardware is a temporary headwind or is it a becoming a permanent problem for companies like IBM? So Christian's own explanation is that clients redirected their late July or late June CapEx towards server storage and memory to lock in supply and ahead of price hikes.

3:37Remember, we've seen Apple raise its prices recently specifically because of memory. Same idea here. So that sounds like a temporary reaction by IBM's customers to soaring memory prices. But on the other hand, Micron recently said that memory supply is going to be tight well into 2027. And we're starting to see these memory companies shift toward longer term price agreed service contracts. So that's what kind of scares me about this long term. Yeah. And this is what kind of bugged me about it a little bit as well. I mean, if this was just a one off, like, yeah, you know, things are going to get shifted maybe six, nine months down the road.

4:12Again,$700 million in sales, not the biggest thing. It seems like this was a big move for a short-term headwind. But when I see things like this, and let's all be kind of honest here, there's a lot of institutional investors and high-frequency traders and might know a little bit more because they can pick up the phone and ask a few things. One of the things I kind of think of is there might be more than one cockroach in the kitchen here. So as we're looking forward, investors that are looking at IBM maybe want to think like, oh man, maybe this is just a good time to buy some cheap shares because of what we've seen today.

4:48What else could be coming down the pipe that may assuage investors or maybe something that may signal it's an actual rough patch? What are some other things that we can look for that may be promising or signs of worse to come? Yeah. So one thing we don't have yet, and Lou mentioned, this is just preliminary report. We don't know everything. We don't have IBM's bookings yet, meaning the future revenue that is now that is being committed to. That's been a big driver of the stock in recent quarters, especially on the AI side of the business. But judging by Christian's generally negative tone that we've heard today, I'm not expecting the bookings number to look nearly as stellar as it did last quarter.

5:26The fact that they pre-announced is really the biggest red flag here. And that's what's, you know, that's usually reserved for when things are especially bad. So my bottom line is that today's move makes sense. It isn't a reason to panic. To be transparent, IBM is a relatively small position in my portfolio right now. So I'm planning to cautiously add to it a little bit if this price holds. The risk reward makes a lot of sense to me, especially if you have a five plus year time horizon. And at that San Diego event you mentioned, I talked about things like how IBM's quietly becoming the quantum computer leader as part of my thesis.

6:01But I'm going to be watching their full earnings report when it comes out on July 22nd very closely. That's my birthday. And that's how much I'm paying attention to this. I'm still going to be reading it. I think it's important to mention just when we talk about, you know, it's on sale today. It's basically the drop means we're back to where we were in mid-May. So before people like yell or go out, it's a buying opportunity. I do think that perspective is needed. The real question here, as Matt hinted at this, is that there is a way to spin this as it's a temporary phenomena and it will pass. There is also a way to read this as what IBM is selling isn't as important to the end customer as what they are buying.

6:46there's almost a question about is you know with consumer we talk about staples and discretionary there is a way to spin this that ibm is in the discretionary bucket and not the you know staple bucket here i don't know if that is the right reading but i think that's a word of caution and you think about this just there can't be you can't spend all the money on the world on everything. At the end of the day, corporations have to make choices. The choices they made in this quarter did not benefit IBM. And I mean, I would agree with that, that IBM is more in the discretionary basket than, you know, consumer staples, especially when it comes to what we're talking here.

7:27Like, you know, you can hire all the AI consultants you want to. If you don't have enough memory to keep your systems going, that really doesn't matter. So when it comes to what their clients are spending money on, it is more of a discretionary thing. And that's why we're seeing revenue kind of ebb and flow during this AI cycle. And as Lou said, let's keep this all in perspective. Over the past three years, IBM is beating the market. Over the past five years, IBM is beating the market on a total performance basis. So yeah, it's been this past, like you said, it's about the same where it was in May.

8:02It's about the same where it was in January. 2026 has not been IBM's shining year so far. But, you know, if we start pulling back the carton, things are still looking OK. We'll have to see whether or not this is a foreboding sign or maybe just, you know, a temporary roadblock. But we will see. Coming up next, we're going to really jump into bank earnings.

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9:06Whether you're debugging code at midnight or strategizing your next business move, Claude extends your thinking to tackle the problems that matter. For problems worth solving, get started with Claude at Claude.ai slash fool. That's Claude.ai slash fool. And check out Claude Pro, which includes access to all of the features mentioned in today's episode. Claude.ai slash fool. So I was checking the earnings calendar for today. And of course, we had all the big banks. And then there was one other company, Fastenal, which I found kind of funny. It was almost like a one of these things is not like the other sort of situation where it's like, yeah, we're going to talk about gigantic banks and then an industrial parts distributor.

9:47But, you know, considering how robust and, you know, beating expectations that pretty much every bank posted, it seemed like it was the more appropriate thing to talk about than this small industrial parts manufacturer, which, you know, maybe for another time. You know, today, J.P. Morgan, Bank of America, Wells Fargo, Goldman Sachs and Citigroup all reported earnings and all of them reported better than expected results. I think the theme of this quarter was massive gains in equity trading. I think Goldman Sachs led the way where they had a they brought in seven point five billion dollars in equities trading this quarter alone.

10:22Now, we can say that it was stock volatility in the SpaceX IPO that resulted in some one off gains. But are there some kind of less discussed themes that led to all these companies posting such good results? Yes, I mean, you're right, Tyler, that the results were generally excellent and not just in they're not just typical earnings beats here. I mean, JPMorgan Chase reported$7.70 in earnings per share. That's almost$2 more than expected. They beat revenue expectations by about$7 billion. Not even close. And it's not just investment banking. I mean, Wells Fargo, their earnings beat by a significant margin, even though they have a very small investment bank.

11:00I push back a bit on when it comes to equity trading on the one-off framing that you just said around the volatility in SpaceX IPO. We're seeing M &A at a level that we haven't seen since 2021. Global M &A was$3 trillion in the first half. And so it wasn't just one dealer IPO. It's a general like industry-wide trend. The question is how sustainable is it? But to more directly answer your question, one thing that I'm not seeing discussed that much is the net interest income side of this. Even with the Fed essentially on hold right now, the banks are generally raising their net interest income expectations.

11:34I mean, JPMorgan Chase, they're expecting$2.5 billion more in full-year net interest income than they were in April. They're seeing strong loan growth. The internal rate dynamics, meaning what they're paying on deposits versus what they're getting on loans, is better than expected. There are a few other big themes, wealth management inflows across the board. Investors are putting money to work that had been on the sidelines. JPMorgan reported 44 ,000, quote, first-time investors. Goldman's assets under management grew by 20 % year over year, and the market isn't up by 20%. More importantly, credit quality is holding up better than we expected.

12:13The big banks, they're reporting lower than expected charge-offs almost across the board. And it shows that despite some major economic fears, you know, inflation, the Iran war, things like that, consumers and businesses are still staying pretty healthy. Yeah. Matt did a great job breaking it down. I'll just make a couple of quick points. One, on net interest margin. Higher for longer works with banks. I'm going to just go up and scream that from the hilltops. Financials make so much sense to me right now where they are valued, especially in the regional banks. I think let's learn a lesson from this in terms of what the interest rate cycle means for banks.

12:46The other thing, let's just do a special shout out for Citi. Citi is usually the butt of a joke when we're discussing banks. They have a long history of screwing things up. But CEO Jane Frazier, the restructuring program seems to be working. They're hitting goals ahead of schedule. They raised a dividend by 12%, announced a 30 billion with a B share buyback program. Citi is the laggard of this group in terms of multiples. The investor takeaway here is maybe it's time to take Citi seriously. Maybe it's time to give them a look. Yeah, Matt, to your point, you know, saying it wasn't necessarily a one-off event, but it certainly does feel like a vibes sort of event.

13:22Like you said, M &A activity is high. IPO activity is high. Money is moving off the sidelines and into the, you know, to use the term, the animal spirit seem to be really hitting everybody right now. And everybody seems to be cashing in. And of course, the house tends to win. And the house in this case is the big banks. I want to drill into something a little bit more specific though. And it was a few weeks back, the banks, all of them went through their stress tests, basically working with regulators to figure out, you know, how much capital you need to keep on the books in the event of a credit event, you know, a lot to do with Dodd-Frank back after the great financial crisis, just in making sure that we don't run into the same problems we had again.

14:01And most of them passed with flying colors this time, in part because the regulatory stress test wasn't quite as robust as it has been in years past. So, so much so that there were discussions at the time about accelerated buybacks and other ways of kind of releasing capital that was on the balance sheet for safety reasons. Did that play any part in these results that has all these stocks doing incredibly well? Or is that maybe just a later down the road sort of story? It wouldn't have played a part in the results. It might be part of the enthusiasm today. Although, look, the bank's got a nice boost when it was announced.

14:35I think why we're seeing the stocks moving higher, it's a simple answer. It's today's results. If one bank shows resilience, that's great for that one bank. But the across-the-board positivity, that sort of implies that wasn't a one-quarter fluke. It wasn't a one-time thing from anyone. There's a lot of fear and nervousness when it comes to financials right now. I think just the across-the-board success today, that should alleviate some of that nervousness. Coming up after the break, we're going to jump into the mailbag.

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16:37Oh, let's go!

17:08somebody apparently is a big fan of you talking about T-bills either here on the podcast or in some of our live appearances that we do for members over at The Motley Fool. Lou, the question comes from Marianne and says, Lou often mentions that he parks money in T-bills. Could you give us a tutorial on how to actually buy T-bills? So, Lou, take it away. Sure. Well, first off, the argument for it is it doesn't replace equities. But look, right now I'm getting almost 4 % on six-month bills. That's better than most online savings accounts, so why not just chase to yield? As far as how you buy them, a couple of pointers.

17:43You can buy treasuries through the U.S. government at treasurydirect.gov, or you can do it through most brokerages. There isn't a different price or different rate, so it's really how you want to do it. I buy through Vanguard, but I know some people like to separate it out. I've heard good things about Treasury direct. That's whatever you want to do. Actual user experience varies by brokerage. It's very similar to buying stocks, though. You just click buy bonds, select treasuries instead of corporates. You can buy existing treasuries on the open market. But what I do is I buy new issues and just hold the maturity.

18:17The most confusing thing or the thing you might want to look at is the way they're priced. You buy new issues in$1 ,000 increments, but you don't pay face value. You pay the amount before interest. So if you pay, say,$980 today and get$1 ,000 back in six months, for example, that's the most confusing part. Other than that, pretty straightforward. And again, it's kind of just as an alternative to savings accounts. When the rates are better, why not take advantage of the rate? Well, Marianne, I hope that answers your question. And back to our kind of stock-related ones, we got a question from Brian, and he really went out of his way to say that he's from corn country of Illinois and not just some other part of Illinois.

18:59And Brian asks, guys, what is up with Toast? I've owned it for about two years, stocks down quite a bit, Motley Fool Podcast, and not to Brian's email, but in a lot of other places within Motley Fool's kind of extended universe of media, we've talked positively about it. And it's been used rather ubiquitously. I think it has a decent market share right now. Brian asks, restaurant parking lots usually seem full. I'm aware costs have increased and margins are tight. is this a lost cause stock toast? I usually hang up stocks a couple of years. What are your current thoughts on toast? Yeah. So, I mean, I'm a fan of toast.

19:34To be fair, I'm one of the ones that you're referring to that usually speaks positively of it. So that's probably not a surprise. But the growth story here is still intact despite any AI disruption fears. So annual recurring revenue grew by 26 % in the last quarter. They added 7 ,000 new locations. So it's a product that's still resonating with customers. Their margins are excellent. Their operating margin, not adjusted, was above 20 % for the first time ever in the most recent quarter. They're aggressively buying back stocks, so the management clearly thinks the stock is underpriced. I mean, the bear case here is with all software-as-a-service businesses like this, is that AI agents are eventually going to commoditize it and kind of drive down users, drive down pricing power, things like that toast is is nicely insulated from this for a few reasons so number one it owns the full stack meaning hardware and software the little toast the things that servers hold in their hands only work with toast software it has done an excellent job of building out its own ai tools and the fact that it's used in 171 000 locations right now that's a pretty competitive advantage in an industry that has a somewhat transient workforce you know if you're already trained on toast in one restaurant, you can easily move to another restaurant and it's a lot less friction to move jobs.

20:55There are some risk factors here to keep in mind for sure. I mean, memory costs we've talked about in our other segments, they're expected to be a pretty big margin headwind to toast because they have a lot of memory needs. There's a lot of competition. Clover has more locations, just toast has more volume. Square, you know, Block Square is still a big part of the restaurant industry. And this is still not a cheap stock, but as long as it keeps growing the top line at 20 % year over year and is doing it profitably, keeps building out its ecosystem of features, I am a fan of toast at these levels.

21:28Yeah, I like the business better than the stock. I've never been enamored with the stock. It's just restaurants are such a tough, low margin business. Matt mentions 171 ,000 locations, but from the BLS numbers, there's about over a million restaurant location. So it's not a huge market share. I don't see anything in what Toast does that it might have been forward, but I don't think there's anything that can't be copied by Clover. So many restaurants go out of business. I don't know if just kind of getting your tools established or anchored in. I don't know if switching costs matter too much. I think this continues to be a just slugfest business, tough to gain margin, tough to gain real pricing power.

22:11And again, I like as a consumer, they've made the restaurant experience better for me. I wish them all the best, but it's just not a stock I'm interested in. Yeah. I don't really have a horse or a dog in this fight, I guess, if you will, mixing my metaphors as always. But I'm just kind of throwing on the bear case cap for a second here, Matt, to your point, it is an intensely competitive space with Clover and Square. And the three of them combined have hoovered up a decent amount of the space in terms of market share. And Toast's gains in market share up until now have garnered that 20 % revenue growth or ARR growth that they have seen.

22:54And the thing that I keep coming back to when I look at this is, you know, what you said was as long as they keep that 20 % revenue growth, well, that involves, you know, continuing to grow market share. And I think that the market share gains from here, where I think they're somewhere in like the mid 20%, at least in some independent data that's been put out there, is going from, you know, that to 40 % is much, much harder than going from, you know, five to 10 % up to where it is today. And so there is a real possibility that revenue could slow as a result because it becomes much more of a knife fight getting, you know, market share relative to a lot of its competitors.

23:31But it seems to be like as anyone who has either seen it or if you talk with people in the industry, they seem to really like the product. And so it has that aspect to it. Not saying that it can't do it, but it's just going to get harder from here. That's all the time we have for today. Lou, Matt, thanks for sharing thoughts on the hip disclosure and we'll get out of here. As always, people on the program may have interest in the stocks they talk about and 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.

24:05Advertisements are sponsored content and provide for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks to producer Bart Shannon and the rest of the Motley Fool team. For Lou, Matt, and myself, thanks for listening, and we'll chat again soon.