IBM Stock Sinks 25% as AI Spending Shift Hits Software Budgets

Key Takeaways

• IBM stock closed 25.2% lower after preliminary second-quarter revenue and adjusted earnings missed Wall Street forecasts.
• The company said customers redirected spending towards servers, storage and memory, contributing to delayed software and infrastructure deals.
• The warning affected technology stocks globally, with NEC, Fujitsu and other Japanese IT companies falling during Wednesday’s session.

IBM’s Preliminary Results Trigger Historic Sell-Off

IBM stock suffered its largest one-day percentage decline on record on Tuesday after the technology company issued an unexpected warning about its second-quarter performance.

Shares closed at $217.07, down 25.21%, erasing approximately $69 billion from IBM’s market value. The decline was particularly notable because the broader US equity market remained resilient, supported by softer inflation data and strong results from major banks.

IBM expects to report second-quarter revenue of approximately $17.2 billion, up about 1% from the previous year. That was below the $17.86 billion average forecast compiled by LSEG and would represent the company’s slowest revenue growth in more than a year.

Preliminary adjusted earnings were estimated at $2.93 per share, compared with market expectations of approximately $3.02. IBM is due to release its complete second-quarter results on 22 July, meaning the current figures remain subject to finalisation.

The scale of the sell-off indicated that investors were responding to more than a modest quarterly miss. The warning challenged expectations that IBM’s software, hybrid-cloud and AI strategy would provide relatively stable growth as customers increased their technology investment.

Why Enterprise Technology Budgets Are Shifting

IBM attributed much of the shortfall to an abrupt change in how some corporate customers allocated their capital expenditure during the final weeks of June.

Chief Executive Arvind Krishna said clients prioritised servers, storage and memory purchases to secure access to supply-constrained infrastructure before anticipated price increases. As a result, some software and related technology projects were postponed.

The trend illustrates an increasingly important division within the AI market. Semiconductor manufacturers, memory suppliers and data-centre equipment providers have benefited from demand for computing capacity. However, the same investment cycle may create pressure elsewhere if companies operate with fixed or slowly expanding technology budgets.

For software suppliers, the near-term concern is that customers could delay application upgrades, consulting contracts or cloud migration projects while they concentrate spending on physical infrastructure.

Nevertheless, IBM’s warning does not establish that software demand is weakening across the entire market. Management described a sharp reprioritisation among its own clients late in the quarter, and the duration of that change remains unknown.

IBM’s Mainframe and Transaction-Processing Weakness

The revenue miss was also connected to company-specific difficulties in IBM’s infrastructure operations.

Preliminary figures indicated that infrastructure revenue fell approximately 7% year over year, a deeper contraction than the company had previously anticipated. IBM identified weaker performance in its Z mainframe business and the associated transaction-processing software portfolio as important contributors.

Mainframe demand tends to follow product cycles, making quarterly comparisons more volatile than those of subscription-based software operations. IBM had initially expected the strong launch of its z17 system to support a more moderate infrastructure decline.

Instead, several large transactions failed to close within the expected period. Krishna acknowledged that IBM did not adjust quickly enough to changing customer priorities, suggesting that execution problems compounded the external pressure from shifting budgets.

The performance across IBM’s divisions was not uniformly weak. Software revenue reportedly increased by approximately 5%, supported in part by Red Hat, while consulting revenue was broadly unchanged. These figures complicate the argument that IBM’s entire software strategy has stalled.

Japanese IT Stocks Follow IBM Lower

The impact reached Asian markets on Wednesday as investors reassessed companies exposed to corporate technology spending.

NEC shares fell approximately 5%, while Fujitsu declined around 5.5%. BayCurrent Consulting dropped nearly 7%, and Nomura Research Institute lost about 5%. The declines left the companies underperforming the broader Japanese market.

The reaction reflected concern that Japanese enterprises may also prioritise AI hardware, data-centre capacity and cybersecurity over traditional software and consulting projects. Companies that rely heavily on large corporate technology contracts could face delayed order recognition if customers alter their investment schedules.

However, the Japanese sell-off was primarily a read-across from IBM’s warning. The share-price declines were not accompanied by new profit warnings from the Japanese companies themselves. Differences in customer exposure, contract structure and geographic mix mean IBM’s experience cannot automatically be applied to every IT services provider.

Does IBM’s Warning Signal a Wider Software Slowdown?

The central question is whether the spending change represents a short-term timing issue or a structural challenge for enterprise software companies.

A temporary explanation is plausible. Customers seeking scarce memory, networking equipment and servers may have accelerated hardware purchases into the second quarter. If those investments are completed, budget capacity could return to software deployment, integration and consulting.

Infrastructure spending can also generate future software demand. New AI systems require data management, cybersecurity, orchestration and application-development tools, areas in which IBM and other enterprise software companies operate.

The more adverse scenario is that AI infrastructure remains expensive for several quarters, continuing to absorb a disproportionate share of technology budgets. AI tools capable of automating coding and other business processes could also cause customers to reconsider the number and value of traditional software subscriptions.

IBM’s final results and management guidance will therefore be important in determining whether the delayed transactions have moved into later quarters or have been cancelled altogether.

What Investors Will Watch in IBM’s Full Earnings

IBM’s 22 July earnings release should provide more detail on segment margins, free cash flow and the company’s full-year outlook.

Investors are likely to focus on the performance of Red Hat, transaction-processing software and the Z mainframe business. Commentary on the delayed large deals may help establish whether the Q2 weakness was mainly a timing problem.

The company’s outlook for software growth will also be closely examined. Continued expansion at Red Hat could support IBM’s longer-term hybrid-cloud strategy, while further weakness in transaction processing would raise questions about the durability of its high-margin recurring revenue.

Until IBM publishes its complete results, the preliminary warning offers an important but incomplete view. It demonstrates that the AI investment boom can produce winners and losers within the same technology market, but it does not yet confirm a broad or lasting contraction in enterprise software demand.