Big Banks Cash In, IBM Crashes Out

**Tyler Crowe** (0:02)
Big banks are loving this market. Today, on Motley Fool Hidden Gems Investing.
Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by long-time Fool contributors, Lou Whiteman and Matt Frankel. As I kind of hinted with the intro, we're gonna 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 reported today. And it looked fantastic. We're also gonna get into some reader emails, but first we're gonna 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. Now, 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 were seeing. There had to have been more to the story here, right?

**Lou Whiteman** (1:15)
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 to sell off is kind of the reasoning given. CEO Arvind Krishna 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.

**Tyler Crowe** (1:54)
Yeah, something in the difference of a $700 million change in revenue. Yeah, the number sounds big, but again, 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, and 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 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.

**Lou Whiteman** (2:31)
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 something like today happens.
As Lewis said, the numbers themselves weren't too awful. I mean, 17.2 billion versus 17.9 billion, that's not worthy of a 26 percent drop all by itself, but there is more to the story.
I mean, earnings per share came in at 293 versus expectations of 302, not worthy of a 26 percent 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 becoming a permanent problem for companies like IBM? So Christian's own explanation is that clients redirected their late June capex towards server storage and memory to lock in supply ahead of price hikes. If you remember, 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 scares me about this long-term.

**Tyler Crowe** (4:03)
Yeah. This is what bugged me about it a little bit as well. I mean, if this was just a one-off, like yeah, things are going to get shifted maybe six, nine months down the road. Again, $700 million in sales, not the biggest thing. It seems like this is a big move for a short-term headwind. But when I see things like this and let's all be honest here, there's a lot of institutional investors and high-fricidity 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 think of is there might be more than one cockroach in the kitchen here.