IBM shares plummeted more than 25% on Tuesday after the company warned of weaker-than-expected second-quarter earnings, attributing the shortfall to an unexpected shift in corporate spending toward AI infrastructure. The tech giant reported preliminary revenue of $17.2 billion, below analysts' estimates of $17.86 billion, and adjusted earnings per share of $2.93, missing the consensus estimate of $3.02.
In a letter to investors, IBM CEO Arvind Krishna acknowledged that the company 'faltered' in adapting to rapidly changing market conditions. He explained that clients redirected significant capital expenditure toward servers, storage, and memory purchases in the final weeks of June to secure supply-constrained infrastructure ahead of expected price increases. This shift, combined with industry-wide cybersecurity concerns, disrupted IBM's sales cycle and delayed the closure of several large deals.
The broader software sector also felt the impact, with shares of Microsoft, ServiceNow, Salesforce, and Intuit declining between 3% and 5%. The iShares Expanded Tech-Software Sector ETF fell more than 4%. Analysts have raised concerns about the long-term implications of this spending shift, with some questioning how sustained the focus on AI infrastructure will be.
IBM's infrastructure division saw a 7% revenue decline, while software revenue rose 5%. The company's flagship z17 AI mainframe program underperformed expectations, contributing to the overall shortfall. Krishna emphasized that while IBM anticipated some supply-chain disruptions, the magnitude of the spending reprioritization was greater than expected.
The stock's decline marks IBM's worst single-day drop in decades, surpassing the 23.7% fall during the 1987 Black Monday crash. The company is scheduled to hold its quarterly earnings call on July 22.