IBM Stock Plunges 25% as Customers Divert IT Spending to AI Infrastructure Ahead of Price Hikes

IBM's mainframe sales get mugged by AI hardware panic, stock loses more than a quarter of its value

CEO Krishna: Customers blew their Z budgets on servers and storage before prices spike, Q2 financials 'disappointing' IBM says customers spooked by soaring demand for AI infrastructure raided their mainframe budgets to stockpile servers, storage, and memory instead, knocking Big Blue's flagship Z business off course. Ahead of its full calendar Q2 earnings release next week, IBM took the unusual step of publishing preliminary quarterly results alongside a letter from CEO Arvind Krishna explaining why the numbers fell short of expectations. The biggest disappointment came in Infrastructure, where revenue fell 7 percent, despite what IBM had previously described as the strongest launch of a mainframe generation in its history. The disclosure has led to a near-26 percent plunge in Big Blue share price. The Q2 culprit wasn't a sudden loss of affection for mainframes, according to Krishna, but a last-minute scramble to secure hardware increasingly caught up in the AI spending boom. "In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases," Krishna wrote. "This dynamic impacted client buying patterns." IBM had expected some disruption from supply chain pressures, he said, "but we did not anticipate the magnitude of the capex reprioritization." That's an unusually candid admission from a company whose Z mainframes remain one of its highest-margin businesses. Customers, it seems, preferred to refresh infrastructure they fear might soon become more expensive or harder to obtain. The spending shift also rippled through IBM's software business because fewer mainframe deals meant weaker sales of the transaction-processing software that typically accompanies them. Krishna pointed to another factor as well, saying clients were distracted by "rapidly evolving, industry-wide cybersecurity concerns" during the quarter, though he offered no further details on what those concerns were or how they affected purchasing decisions. IBM was willing to shoulder some of the blame. "These conditions require our teams to execute perfectly, and this quarter we faltered," Krishna wrote. "We did not adapt and move quickly enough, and numerous large deals failed to close on the timelines we expected, driving the majority of our shortfall." Not everything disappointed. Red Hat revenue grew 11 percent, recent acquisitions including HashiCorp and Confluent performed strongly, and IBM's Distributed Infrastructure business posted record reported growth of 37 percent, driven by Power servers and storage systems. Still, the quarter offers another sign of how the AI infrastructure race is reshaping enterprise IT budgets. For at least one quarter, customers decided the safest investment wasn't the newest mainframe - it was buying as much in-demand hardware as possible before someone else did. ®

IBM share plunge is a warning to the IT sector

AI demand is starting to crowd out other forms of sector spending Spending on data centres has been one of the main things powering a historic boom in IT spending. Now, as the scramble for increasingly scarce resources gets intense, it is becoming the only thing. That is one reading of an earnings warning on Tuesday that sent shares in IBM into a tailspin. If chief executive Arvind Krishna is right to pin the blame on wider market forces, rather than merely mistakes by his own company, then it could point to a new phase in an AI infrastructure boom that rests on increasingly narrow foundations. IBM stepped in ahead of the second-quarter tech earnings season to reveal that its revenue grew only 1 per cent in the latest period, lower than the 5 per cent analysts had been expecting. According to Big Blue, customers last month began diverting a significant part of their regular IT spending towards the sort of server, storage and memory equipment that has been in high demand in the AI boom, hitting sales of its own mainframe computers and software. The cyber security panic caused by Anthropic's Mythos model may also have thrown IT spending plans for a loop: As companies deal with the threat, according to IBM, other priorities have taken a back seat. The 25 per cent drop in IBM's stock price on a relatively modest earnings warning attests to investors' extreme nervousness. But it also points to a fear that the pattern of IT demand is shifting more significantly. Until now, there hasn't been much evidence to suggest that AI has been displacing other forms of IT spending. The devastation to software stocks known as the SaaSpocalypse mainly reflects a fear that AI will eventually reduce the need for much of today's software, rather than any evidence that it is having an impact already. After the first quarter of this year, IT research firm Gartner reacted to soaring data-centre spending by simply raising its IT spending forecasts for 2026. There was a general expectation that AI would add to overall tech demand, rather than causing cutbacks in other forms of IT spending. IBM's warning suggests things may be changing. One big question that will be on Wall Street's mind as the latest earnings season gets under way is how far the infrastructure boom has already gone in crowding out regular IT spending elsewhere. The other is whether spiralling infrastructure costs will raise the price of -- and limit demand for -- new AI services. Looking for other potential victims, investors reacted to the IBM news by taking another bite out of the shares of software companies including ServiceNow and Adobe. Makers of electronic devices may also start to suffer, as higher component prices for things like PCs, games consoles and smartphones make their products less attractive. For the companies that have been riding the generative AI wave, meanwhile, IBM's warning highlights new dangers as the competition for resources intensifies. Krishna said his company's customers were racing to divert more of their budgets into AI equipment before price rises on things such as memory chips took effect. That highlights two risks. One is that timing issues could introduce an extra level of unpredictability into AI infrastructure spending. If, to beat price increases, companies rush to buy equipment before the new data centres to house it have been completed, they may slow spending in future periods as they digest what they have already bought. For a market on high alert for any sign that AI capital spending is weakening, timing considerations like this could introduce a new level of volatility. The other risk is that rising prices will consume an ever larger share of capex budgets. To the extent that more of the billions being poured into data centres are going into the pockets of memory chip investors rather than extra computing capacity, it will limit the supply of AI. Nvidia's gross profit margin of 75 per cent is evidence of the gains for chipmakers. Likewise the 83 per cent margin that Micron reported in the latest quarter, more than double its level of a year before. Improvements in the performance of the latest generation of AI accelerators and high-bandwidth memory chips will offset some of the effects of rising prices, and the cost of producing tokens -- the basic unit of output from large language models -- may continue to fall. But the competition for computing resources will keep prices for AI services higher than they otherwise would be, at just the moment that demand is starting to take off.

IBM shares plunge after preliminary Q2 revenue falls short of estimates despite surging AI bookings

IBM shares fell sharply after preliminary Q2 revenue came in below estimates despite AI bookings topping $12 billion cumulatively. IBM issued preliminary second-quarter results on Monday showing revenue of roughly $17 billion, up one percent year over year but well below the $18 billion that analysts had expected. Shares fell as much as 17 percent in premarket trading, erasing weeks of gains that had been fuelled by bullish analyst coverage and a stock rally of 30 percent in May alone. CEO Arvind Krishna called the results disappointing in a letter to investors. The miss was broad. Software revenue rose five percent, with Red Hat up 11 percent, but both fell short of forecasts, while consulting was essentially flat and infrastructure revenue dropped seven percent as clients pulled back on mainframe and storage purchases. Krishna blamed execution issues including large deals that failed to close, and said some clients shifted capital spending toward servers, storage, and memory in the final weeks of June ahead of expected tariff-related price increases. Adjusted earnings per share came in at nearly three dollars, also below the roughly three dollar consensus. Gross profit margin fell to just under 58 percent, down about one percentage point from a year earlier, while pre-tax margin slipped to just over 14 percent. The combination of weaker revenue and narrower margins drove the sharp sell-off. The one bright spot was artificial intelligence. IBM said cumulative AI bookings have now surpassed $12 billion, suggesting sustained enterprise demand for AI consulting and infrastructure even as the broader business stumbled. The company has been investing heavily in AI partnerships, including a recent tie-up with OpenAI on enterprise cybersecurity, and Krishna has framed AI as the growth engine that will eventually reshape the company's revenue mix. But the preliminary results raise questions about whether that AI momentum can offset weakness in IBM's legacy businesses quickly enough. The infrastructure decline and consulting stagnation are familiar problems for the company, and the execution issues Krishna cited suggest internal challenges beyond macroeconomic headwinds. IBM plans to release full quarterly results later this month. For investors who had bought into the thesis that IBM was finally turning a corner, the preliminary numbers are a reminder that the transition from legacy enterprise computing to an AI-driven business remains uneven. The stock had been one of the best performers in the technology sector this year before Monday's drop.

Manic markets show no mercy to IBM

IBM issued a profit warning that sent its shares plunging more than 20 per cent, as customers raced to redirect spending to servers and storage ahead of price increases driven by the AI boom. The tech company had expected strong sales in mainframes and related software but instead corporate clients shifted to buying computing infrastructure from elsewhere. [...] Shares closed 25 per cent lower, in the biggest drop since at least 1972. International Business Machines Corporation, whose full name is just a bit less clunky than its predecessor firm, the Computing-Tabulating-Recording Company, has not been on tech's cutting edge for a while. Though the company is perhaps most well known for its hardware-driven enterprise mainframe computing business, today most of its revenue comes from software. It also has considerable IT consulting and finance segments. In recent years, they've tried a rebrand as a "hybrid cloud and AI" company, a transition that has been executed with mixed results. Red Hat, a 2019 cloud acquisition, has been a notable growth engine, but watsonx, IBM's longstanding AI play, has largely been lapped by the rise of the big AI labs. With over $8.3bn in R&D spend last year the company hasn't thrown in the towel on innovation, but it's definitely at the more value end of information technology. But many companies that are far from the cutting edge are doing just fine in the AI boom. So what has gone wrong here? Goldman's post-results analysis flags what they call "company-specific execution issues". The company knew it was delivering bad news, accompanying its announcement with a letter from CEO Arvind Krishna, who wrote: These conditions require our teams to execute perfectly, and this quarter we faltered. We did not adapt and move quickly enough, and numerous large deals failed to close on the timelines we expected, driving the majority of our shortfall. These are not excuses, but they are realities. In their announcement, the company highlighted increasing capex in servers and memory for worse earnings results, which speaks to memory mania that isn't slowing down. What's interesting about the massive sell-off is that the hard numbers behind it seem . . . not that bad? Infrastructure revenue fell 7 per cent in the second quarter, IBM said, compared with an expectation for a "low single-digit" decline. Software revenue rose 5 per cent. Overall revenues were $17.2bn, up 1 per cent on the same period a year ago but below analyst estimates of $17.8bn. Earnings per share fell 2 per cent to $2.27 and were also below forecasts. We're surprised that produced a drop that surpasses Enron's inter-day change the day the SEC opened an accounting enquiry (-20.7 per cent). IBM's modest losses don't seem to justify such a harsh sell-off -- nor Krishna's Masayoshi Son-style apologies. But these are not normal times. It might not be all bad news. Though Goldman "expect[s] the stock to trade meaningfully lower" following the announcement, they maintained their 2026-2028 EPS estimates. HSBC, however, downgraded them from hold to reduce. Shares ended the day at $217 -- a far cry from the price target of $350 Barclays set last month in a report that compared IBM's trajectory in the quantum space to Nvidia's. They say that "no one ever got fired for buying IBM". That procurement adage may not apply to portfolio managers today.

This "will rattle many": IBM stock tanks as AI budgets shift

Why it matters: The software industry is suffering as companies shift their tech spending from conventional software to AI tokens and data centers. Driving the news: IBM CEO Arvind Krishna delivered a preliminary look at the company's second-quarter earnings, saying IBM had "faltered" in adapting to the AI spending shift. * "We did not anticipate the magnitude of the capex reprioritization," Krishna said in a letter to shareholders, noting that clients were also "distracted" with cybersecurity needs driven by emergent AI threats. * "This a major miss that will rattle many," Baird managing director Ted Mortonson tells Axios in an email. Threat level: Krishna said the rising costs of chips left less room for IBM's bread and butter: mainframes and software. * "In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases," Krishna said. Zoom in: IBM saw this play out with sales in its Z platform, mainframes that process many of the world's financial transactions, airline reservations and other mission-critical computing workloads. * IBM launched the newest generation of the platform, the AI-focused z17, in 2025, in what it called its strongest second quarter launch in company history. But Tuesday, Krishna noted a "shortfall" in sales in the recent quarter. * The results suggest more customers are deferring purchases, with Krishna noting that "numerous large deals failed to close on the timelines we expected." By the numbers: IBM's software revenue is expected to rise 5%, compared with Wall Street's expectation of 10%, according to Evercore ISI analysts. * Infrastructure revenue is expected to fall 7%, compared with expectations of a 3% decline. Yes, but: While software spending is under pressure, AI spending is increasingly under scrutiny, as well. * Companies are implementing AI usage caps and shifting toward lower-cost models to preserve budgets, according to UBS analyst Taylor McGinnis. What we're watching: Whether IBM can fill the gaps with new sources of revenue, such as quantum computing. * The company recently announced plans to partner with the U.S. Department of Commerce to build Anderon, matching $1 billion in federal funding to build the quantum wafer foundry. * Krishna said IBM is also "on track to deliver the first large-scale fault-tolerant quantum computer by 2029." The bottom line: The AI economy is starting to claim some victims.

'Worse than our expectations': IBM's shares drop 25% after CEO says it hasn't adapted quickly enough to AI industry changes

IBM's share price just dropped by a whopping 25%. That's thanks to IBM's CEO, Arvind Krishna, saying the company didn't adapt quickly enough to the industry moving towards spending less on software and more on data centre infrastructure (via CNN). As noted by CNN, this puts the company in the vicinity of its worst day ever, which was Black Monday in 1987. Although it should also be noted that this steep drop occurred during pre-market trading, which tends to be more volatile than in-hours trading. We'll have to see where the chips actually fall by the end of the day. There's also the fact that although it's a big drop for a single day, it's just returned things to how they were back in mid-May, with the stock price sitting at around $215. That's already climbed back up ever so slightly to around $220. According to CNN, the company CEO explained: "What played out was worse than our expectations. We did not adapt and move quickly enough... While we anticipated some supply chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization." "These conditions require our teams to execute perfectly, and this quarter we faltered. These are not excuses, but they are realities." Given this tone will have been directed at investors, it's obvious why the share price has fallen. Investor calls and previews are times for presenting as good an image as possible, and given this context, presenting "not excuses" but "realities" isn't likely to inspire much confidence. IBM is now largely a business-to-business software solution and consulting company, and it's understandable how the once-dominant behemoth could therefore have struggled to make the most of the new AI data centre-centric industry. That being said, the company does still have its foot in hardware, as it recently announced the "world's first" sub-nanometre chip tech. The CEO's comments were a preview of the actual reporting of the company's second-quarter earnings. Those are set to be reported next week, on July 22.

IBM shares plummet 25% on weak preliminary earnings

Shares of IBM Corp. dropped 25% today after it posted preliminary second quarter earnings that missed expectations. The company estimates that it generated $17.2 billion in revenue during the three quarters ended June 30. Analysts polled by FactSet expected $660 million more. IBM's adjusted earnings of $2.93 per share also fell short of the consensus estimate, which forecasted $3.01 per share. IBM Chief Executive Officer Arvind Krishna attributed the weak results to slow mainframe demand. In April, the company debuted a new flagship mainframe called the IBM z17. It features a custom chip with an eight-core central processing unit and an artificial intelligence accelerator. Krishna wrote in an investor letter that "this was the strongest start to a mainframe program in our history" but sales ultimately missed expectations. The slowdown dented demand for IBM's mainframe-based transaction processing software, which further weighed on its revenue. The company says that its mainframes help process 87% of all financial transactions. IBM's mainframe business counts 44 of the world's 50 largest banks as customers. Krishna attributed the slow demand to changing customer priorities. The executive wrote in today's investor letter that IBM clients prioritized servers, storage and memory over mainframe purchases in the second quarter. "These conditions require our teams to execute perfectly, and this quarter we faltered," Krishna wrote. "We did not adapt and move quickly enough, and numerous large deals failed to close on the timelines we expected, driving the majority of our shortfall." The spending shift to servers and storage had a silver lining for IBM. The company's distributed infrastructure business, which includes its Power server line and storage systems, saw sales grow 37% year-over-year. That's an all-time record, but IBM's overall infrastructure revenue still declined 7% on account of weak mainframe sales. The strong demand for IBM's distributed infrastructure products wasn't the only bright spot in its second quarter earnings. The company's software revenue rose 5% year-over-year thanks partly to its recently acquired HashiCorp and Confluent units. The former business develops tools that automate infrastructure management tasks. Confluent, in turn, sells a platform that enables companies to move data between applications in near real-time. IBM's consulting revenue rose only 1% in the second quarter. However, Krishna noted that the company experienced "continued growth in consulting signings led by strong GenAI contribution." In May, IBM and Red Hat teamed up to provide AI-powered cybersecurity services through an initiative called Project Lightwell. It's designed to help organizations fix vulnerabilities in the open-source components that power their software.

Why IBM shares crashed 26%: CEO Arvind Krishna highlights customer spending shifts towards AI

IBM's second-quarter results missed expectations, impacted by customer spending shifts, triggering one of the worst crashes in its stock. CEO Arvind Krishna said clients prioritized AI infrastructure, securing supply-constrained hardware in June. He also atrributed the shortfall to execution lapses and a mainframe business setback. IBM Chairman and CEO Arvind Krishna attributed the company's weaker-than-expected second-quarter performance to an unexpected shift in customer spending towards AI infrastructure, including servers, storage and memory, to secure supply-constrained hardware, which affected its Software and Infrastructure businesses. Shares of the company fell over 26% to $213.22 following the update, which was their biggest intraday loss in 58 years, according to a Bloomberg report. US MarketsPowered By As on 14 Jul 2026, 11:18 PM IST S&P 500 Top Gainers CrowdStrike Holdings208.22(10.81%) Goldman Sachs Group1,127(7.75%) Monolithic Power Systems1,390(7.67%) Dell Technologies458.08(7.25%) Gainers" S&P 500 Top Losers IBM218.96(-24.56%) Coterra Energy32.56(-8.62%) HCA Healthcare362.90(-7.12%) GE HealthCare Techs60.96(-6.66%) Losers" IBM said preliminary second-quarter revenue stood at $17.2 billion, missing analysts' expectations of $17.9 billion. Revenue from its Infrastructure division fell 7%, while preliminary diluted earnings slipped 2% to $2.27 per share. The company said it is still finalising its financial statements, with official quarterly results due next week and subject to minor revisions. Krishna said customer spending priorities changed sharply in the final weeks of June. "In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases. This dynamic impacted client buying patterns. While we anticipated some supply chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization," he said. Krishna acknowledged execution lapses, saying, "These conditions require our teams to execute perfectly, and this quarter we faltered. We did not adapt and move quickly enough, and numerous large deals failed to close on the timelines we expected, driving the majority of our shortfall." Also Read: Is Wall Street heading towards a massive crash? Here's what history hints The biggest setback came from IBM's mainframe business. Although the company had anticipated a moderation in Infrastructure revenue after the record launch of its z17 mainframe, the decline was steeper than expected as sales of IBM Z systems and related transaction-processing software fell short of forecasts. IBM also cited rapidly evolving cybersecurity concerns across industries, which distracted customers and delayed technology purchasing decisions during the quarter. Despite the disappointing quarter, IBM highlighted areas of resilience. Red Hat revenue growth accelerated to 11%, recently acquired businesses such as HashiCorp and Confluent performed strongly, and its Distributed Infrastructure business posted a record 37% growth, supported by robust demand for Power servers and storage systems. Consulting signings also remained healthy, driven by generative AI projects. Looking ahead, IBM said it is accelerating initiatives to improve execution while continuing to invest aggressively in AI and quantum computing. The company recently launched Lightwell, a new AI-powered cybersecurity platform, and reaffirmed plans to build a large-scale fault-tolerant quantum computer by 2029. "Lightwell is a $5 billion commitment backed by new frontier AI capabilities and a global force of more than 20,000 engineers. Early adopters include organizations like Bank of America, BNY, Citi, Goldman Sachs, JPMorganChase, Mastercard, Morgan Stanley, and more," he said.

IBM warns AI boom is squeezing software budgets, triggers sector rout

Software investors have long been on edge over fears that AI tools capable of automating routine work could pose an existential threat to the industry. Tuesday's announcement showed that even the boom in spending on servers, chips and networking gear for AI was eating into software budgets. IBM sparked a market rout on Tuesday after forecasting second-quarter revenue below estimates and signaling that businesses were favoring spending on data-center infrastructure over software, the starkest sign yet of AI's growing toll on the sector. Shares of Big Blue slumped 20% in premarket trading, dragging other software stocks and Dow futures lower. The iShares ⁠Expanded ⁠Tech-Software Sector ETF was last down more than 4%. Software investors have long been on edge over fears that AI tools capable of automating routine work could pose an existential threat to the industry. Tuesday's announcement showed that even the boom in spending on servers, chips and networking gear for AI was eating into software budgets. "In the last few weeks ⁠of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead ⁠of expected price increases," IBM CEO Arvind Krishna said in a letter to investors. "While we anticipated some supply-chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization," Krishna said, adding that the company had "faltered" in adapting quickly enough and that "numerous large deals" had failed to close as expected. According to the preliminary results, the company expects revenue of $17.2 billion during the quarter, compared with analysts' estimate of $17.86 billion, according to data compiled by LSEG. Adjusted earnings per share is expected to be $2.93, compared with the ⁠estimate of $3.02. "This is an ugly moment for IBM and software stocks... the big question will be how long the shift to infrastructure and cybersecurity lasts," said Chris Beauchamp, chief market analyst at IG Group. "A few more months might be bearable, but more than that and serious questions will be asked all over again about software stocks." Microsoft, ServiceNow, Salesforce and Intuit fell between 3% and 5%.

IBM's 25% crash reveals AI's hidden corporate casualty

IBM's board faced an uncomfortable decision after learning that the company's second quarter had fallen well short of expectations. Directors can now take a breather and wait until the scheduled earnings release and let executives explain the results in detail. Or they could warn investors immediately and risk a violent market reaction. They opted for disclosure. IBM (IBM) shares fell more than 25% on July 14, wiping off approximately $69 billion in market value in the company's worst one-day drop ever. IBM's market valuation is around $202.5 billion, after the stock ended July 17 at $212.67. The early data were disappointing but not bad enough on their own to justify the magnitude of the selloff. IBM estimates revenue for the second quarter to be $17.2 billion, up 1% from a year earlier, and operating earnings of $2.93 a share. Wall Street was looking for about $17.86 billion in sales and $3.02 per share, according to LSEG statistics as cited by Reuters. What spooked investors was the cause for the shortfall. Customers shifted spending to servers, storage, and memory that are needed for artificial intelligence infrastructure. And little hardware went to the front of corporate purchase queues, slowing large IBM software and mainframe-related deals. That suggests a risk that extends well beyond one particularly poor quarter. Artificial intelligence can weaken IBM without replacing it. It can affect IBM by reducing the technological budgets its clients once spent on traditional software, consulting, and mainframe systems. "This quarter we faltered," IBM CEO Arvind Krishna wrote in his letter to investors. IBM's warning broke its turnaround narrative IBM had a lot of momentum going into the quarter. First-quarter revenue rose 9% to $15.9 billion. Software revenue increased 11%, infrastructure advanced 15%, and IBM Z revenue jumped 51%. Management maintained its expectation for more than 5% constant-currency revenue growth in 2026 and approximately $1 billion of additional annual free cash flow. But the preliminary second-quarter data altered that tale quickly. Software grew at a slower rate of 5%. Consulting revenue was flat. Infrastructure revenue decreased 7%, below management's prior guidance for a low single-digit decline as the first IBM z17 mainframe launch cycle developed. IBM claimed the infrastructure drop was worse than expected due to inadequate Z system performance and related transaction processing software. That counts. IBM did not say large acquisitions had failed or businesses newly acquired were crumbling. Krishna said HashiCorp and Confluent performed well, while Red Hat revenue growth accelerated to 11%. There was significant wholesale infrastructure demand for IBM. Its distributed infrastructure business, including power systems and storage, gained 37% and ended the quarter with a backlog of over $500 million. IBM also claimed that the z17 program was still approximately 130% of the corresponding z16 cycle, despite the quarterly setback. The trouble was that IBM didn't translate enough of that demand into the sales mix and timing that investors wanted to see. Customers moved late-quarter capital investment to supply-constrained servers, storage, and memory ahead of expected price hikes. Many significant transactions did not close on time because the corporation did not respond fast enough, said IBM. Some deferred deals may still close in later quarters. That would imply the second-quarter failure was mainly a timing issue, not a sign of lasting demand destruction. But a corporation that portrays itself as a trusted navigator through complicated technology shifts should know how its greatest customers are allocating their finances. The board of IBM reportedly grilled Krishna before choosing to send out the early warning. The move might ultimately help the company regain confidence through transparency, but for investors, the decision initially was considered a sign that management had lost visibility into its own sales funnel. That's why a small revenue miss set up a massive stock-market reaction. The quarter didn't just test IBM's financial guidance. It did not make the case that the corporation could navigate a shift from traditional enterprise computing to artificial intelligence with any reliability. AI is squeezing IBM from two directions So the first challenge is budget competitiveness. To develop artificial intelligence systems, companies require processors, memory, storage, networking equipment, and data center capacity. If these components are in limited supply, or if their price is likely to rise, consumers may buy them before accepting less urgent software or consultancy projects. That seems to have been the case in the closing weeks of IBM's second quarter. Banks and other big companies focused on infrastructure buys, throwing off the timing of software and mainframe deals IBM anticipated to close. IBM's warning was among the clearest signals thus far that spending on artificial intelligence may squeeze other business technology expenditures, Reuters said. So IBM can get a piece of that spend. The 37% rise in distributed infrastructure shows that consumers were buying some IBM servers and storage solutions. But its strength was not enough to offset weakness in the higher-end mix of mainframes and transaction-processing software. That points to a big weakness in IBM's broad portfolio. The company supplies gear, software, and consulting services that work together. That mix can improve customer ties as tech budgets broaden. Things become trickier when clients have strong preferences for one group or the other. IBM could win a storage sale but lose or delay the software and consultancy revenue that was to accompany it. Therefore, spending on artificial intelligence infrastructure can stimulate demand within one IBM division while at the same time hurting another. The second challenge is product replacement. AI-powered coding bots and automation technologies could one day lower the costs firms spend for traditional software development, application maintenance, and consultancy services. They could also facilitate the modernization of legacy systems without such heavy reliance on the vendors who built and maintain them. IBM is especially vulnerable since its hybrid-cloud strategy straddles two computer eras. Red Hat helps users run applications on private systems and public clouds. IBM consultants help major enterprises modernize their technology while keeping vital software and data that resides on mainframes. The plan relies on clients continuing to pay IBM to bring their legacy operations together with modern technologies. If companies require help with securely implementing complex systems, artificial intelligence could make that bridge more useful. It also could lower the value of the bridge if automation makes it easier to move or if consumers spend their available money elsewhere, such as on infrastructure vendors, cloud platforms, and independent AI developers. That's the secret problem underlying IBM's warning. The corporation isn't merely trying to market artificial intelligence. It is vying for its customers' dollars with artificial intelligence. IBM has proven to be able to create demand for AI. The corporation announced a generative AI book of business exceeding $12.5 billion as of the close of 2025. IBM's definition, however, mixes software transaction revenue and new annual contract value from software subscriptions and consultancy contracts. That does not mean $12.5 billion of reported quarterly or annual AI revenue, however. IBM still has to translate those contracts and signings into sustainable growth that can offset challenges elsewhere. IBM is increasingly looking to software businesses and technology it has bought, which still hold the most significant money-making potential in the future. Red Hat has continued to post double-digit growth, while Krishna claimed HashiCorp and Confluent did well throughout the quarter. Those businesses improve IBM's hybrid cloud, infrastructure automation, and data management position. IBM is also making a big investment into quantum computing. The firm says it expects to invest more than $10 billion over five years and is on course to deploy a large-scale fault-tolerant quantum computer in 2029. IBM also revealed plans for a quantum wafer foundry, financed by $1 billion in proposed federal incentives and $1 billion in business contributions. Those projects could gain strategic importance. They can't fix the next couple of quarters. Investors looking to buy IBM after the selloff face the question of whether the company's existing software business can pay for long-term objectives as artificial intelligence impacts client spending in real time. Alex Wong / Getty Images What IBM investors should watch before buying the dip The first issue is full-year guidance. It did not revise its annual outlook in the preliminary-results letter. Management said it would disclose full-year estimates when it announces final second-quarter earnings on July 22. IBM had previously projected more than 5% constant currency revenue growth and $1 billion of incremental free cash flow for 2026 ahead of the warning. A big cut would suggest management believes the expenditure interruption is more than a one-quarter timing issue. The second question is whether delayed deals pay off. Many significant transactions did not close within IBM's projected schedule, said Krishna. Investors will have to figure out whether those clients merely delayed their selections or whether they shifted the money permanently. A delayed sale can increase revenue over time. If a project is cancelled, that would mean that artificial intelligence has shifted the customer's priorities in a more fundamental way. Third is IBM Z. The z17 was still ahead of the identical z16 program, but the division had not yet delivered the quarterly results management had expected. Investors should gain more clarity on shipments, capacity expansion, and revenue from transaction-processing software that comes with those systems. The fourth problem is the quality of software growth. The 11% growth at Red Hat, plus HashiCorp and Confluent's showing, is proof that IBM's modernization portfolio is solid. But shareholders need to take organic performance apart from acquired growth and see if new products can make up for decline in mature software sectors. Cash flow is important, too. In the first half, IBM had $4.8 billion in free cash flow. IBM's debt was $66.4 billion at the end of the first quarter, an increase of $5.1 billion from the end of the year as it invested in the Confluent purchase. That balance sheet does not mean an imminent crisis. That means IBM has less space for repeated execution errors as it integrates acquisitions, maintains its dividend, and funds costly artificial intelligence and quantum computing programs. Key takeaways for IBM investors * IBM's preliminary second-quarter revenue and adjusted earnings fell below Wall Street's expectations. * The stock's 25% plunge erased roughly $69 billion in market value and marked IBM's largest one-day decline on record. * Customers redirected late-quarter spending toward scarce servers, storage and memory, delaying large IBM transactions. * Red Hat, HashiCorp, Confluent and distributed infrastructure provided important areas of strength. * Artificial intelligence could pressure IBM both by consuming technology budgets and automating work performed by traditional software and consulting vendors. * IBM's July 22 outlook will help determine whether the miss was temporary or evidence of a deeper turnaround problem. IBM's historic decline does not prove the company has become irrelevant. Its biggest customers still rely on IBM systems for important financial, governmental, and industrial workloads. Red Hat continues to grow, demand for distributed infrastructure remains high, and the z17 program continues to outpace its predecessor on a comparable basis. But the warning changes the burden of proof. Krishna's goal has been to position IBM as the link between old corporate systems and the future generation of cloud, artificial intelligence, and eventually quantum computing. That middle position looked promising as customers were growing multiple technology expenditures at the same time. The danger increases when artificial intelligence pressures customers to decide which investments to fund first. IBM may find that the infrastructure needed for AI eats up the budget before IBM's software and consultancy businesses can monetize the transition. At the same time, more advanced AI technologies might put longer-term pressure on the older software and services companies that are funding the company's shift. A race that IBM can't win by just sitting around. There's a recovery case; if the delayed transactions close, Red Hat will keep double-digit growth, and the firm will preserve its full-year cash-flow objective. Then the size of the selloff could seem extreme relative to a transient disruption to buying. If IBM decreases yearly projections, demand for transaction processing continues to weaken, or significant customers build up artificial intelligence capabilities themselves without buying the broader IBM portfolio, the bearish case is strengthened. The question is not whether IBM is in artificial intelligence. The question is whether the corporation can generate enough AI-related revenue before the technology cannibalizes the companies IBM is utilizing to fund its future. The Arena Media Brands, LLC THESTREET is a registered trademark of TheStreet, Inc. This story was originally published July 19, 2026 at 12:47 PM.

IBM forecasts preliminary Q2 revenue below estimates as spending shifts to AI

According to the preliminary results, the company expects revenue ⁠of $17.2 billion during the quarter, compared with analysts' estimate of $17.86 billion, according to data compiled by LSEG. IBM's preliminary second-quarter revenue forecast came below Wall Street estimate on Tuesday, as customers prioritized spending on AI infrastructure, including servers, storage ⁠and memory ⁠purchases, sending its shares slumping 17% in premarket trading. The results reflect an industry-wide shift in technology spending toward AI infrastructure, reducing budgets for traditional ⁠software. According to the preliminary results, the company expects revenue ⁠of $17.2 billion during the quarter, compared with analysts' estimate of $17.86 billion, according to data compiled by LSEG. Adjusted earnings per share is expected to be $2.93, compared with the estimate of $3.02. IBM CEO Arvind Krishna said in a letter to investors ⁠that in this quarter the company "faltered" in adapting quickly enough to the evolving market conditions, leading to "numerous large deals" not closing as expected.

IBM's historic crash exposes an AI spending trap for the company

IBM (IBM) shares lost roughly one-quarter of their value on July 14 after the tech giant dropped disappointing preliminary second-quarter results. The collapse was historic, but the severity of the earnings gap alone doesn't explain the market reaction. IBM could be in an artificial intelligence expenditure trap. Corporate IT budgets are still expanding, but buyers are shifting money to servers, storage, and memory before tight supplies push prices higher. That's good news for hardware makers and bad news for the software and consulting deals IBM is relying on more and more for profitable growth. IBM is on both sides of that market. It provides mainframes, storage, and enterprise software and consults corporations on technological projects. But such enterprises don't have equal economics. IBM's software division had a gross margin of 82.8% in the first quarter. Infrastructure accounted for 56.9% and consultancy for 27.5%. A dollar deferred in software might thus cost the organization more than a dollar earned elsewhere benefits it. The concern for investors is no longer just whether IBM missed one quarter. Is the AI infrastructure boom just a temporary reshuffling of enterprise budgets, or is it permanently draining dollars from the products that make up the core of IBM's valuation? "These conditions require our teams to execute perfectly, and this quarter we faltered. We did not adapt and move quickly enough," IBM CEO Arvind Krishna said. IBM's AI strategy depends on software winning the budget fight IBM came into the second quarter with a lot of enthusiasm. Revenue grew 9% to $15.9 billion in the first quarter. Software sales grew 11%, infrastructure jumped 15%, and consultancy grew 4%. The company produced $2.2 billion of free cash flow and reaffirmed its outlook for more than 5% constant currency revenue growth in 2026. That achievement helped IBM's transition from a slowly expanding legacy technology company to one more and more valued for software, hybrid cloud, and artificial intelligence. Software drives that change. IBM's biggest business, the segment generated $7.1 billion of first-quarter revenue. Red Hat, automation, data products, and transaction-processing software drove growth, according to IBM's first-quarter statistics. IBM has also been investing extensively in watsonx, its suite of technologies for designing, regulating, and deploying artificial intelligence applications. The company's objective is not only to compete in training the biggest model or building the fastest AI accelerator. It seeks to assist organizations in linking artificial intelligence to their data, existing apps, and regulated business processes. In theory, the method should benefit IBM as firms move beyond experimentation with AI to deploying it across their operations. The problem is enterprise technology budgets have their limits. A corporation might need to shore up its processors, memory, networking equipment, and storage before it can ship more software. But scarcity and anticipated price hikes might make those purchases urgent, while a software agreement could wait until next quarter. IBM's next mainframe was designed to bolster both sides of the portfolio. The IBM z17 includes more than 250 potential AI use cases, with built-in artificial intelligence capabilities. Strong mainframe demand also tends to produce related transaction-processing software revenue as customers need software to run the systems. That linkage is what makes the second-quarter miss even more troubling. Hardware revenue wasn't the only weak spot in IBM Z. It also cut demand for the related software stack, converting one delayed infrastructure acquisition into a broader earnings problem. IBM's preliminary results reveal the AI spending trap IBM's preliminary second-quarter revenue increased 1% to $17.2 billion. Software sales grew 5%, consulting was flat, and infrastructure decreased 7%. Operating, non-GAAP diluted earnings rose 5% to $2.93 per share. Operating gross margin, however, declined 70 basis points to 59.4%. Year-to-date free cash flow was $4.8 billion. Those findings were not disastrous by themselves. Revenue and adjusted earnings were still up, and IBM was still profitable. The market response was a measure of how far the figures fell short of the growth narrative investors were looking for following the first quarter. Krishna said IBM anticipated some fall after the strong z17 launch but misjudged how steep the decline would be. The corporation cited lower revenue from related transaction-processing software and inadequate IBM Z performance. IBM said numerous large deals failed to close on the timelines management expected, accounting for most of the shortfall. Recent acquisitions HashiCorp and Confluent, however, performed well. In the last weeks of June, customers moved capital investment to servers, storage, and memory. They were trying to buy equipment that suppliers had constrained before expected price increases. IBM didn't totally avoid the spending. Distributed infrastructure revenue was up 37%, its best performance ever, as IBM said its Power and storage products were up. The unit left the quarter with around $500 million in backlog. Revenue growth for Red Hat was also up 11%. And that is what creates the trap. IBM can get a piece of the hardware spending boom, but the revenue mix may be less profitable than the software transactions clients are delaying. Thus, the company may capitalize on demand for AI infrastructure, even while it underperforms for investors. Cybersecurity was another difficulty. IBM claimed industrywide security concerns were rapidly evolving and distracting customers. The company's warning follows Anthropic's revelation that their Claude Mythos Preview model was able to discover and exploit previously unknown software vulnerabilities under testing conditions. The development is a big deal for cyber defenders, as similar models might slash the time and cost of finding exploitable holes, Anthropic said. The company's Project Glasswing update warned of how the usual delays between finding, fixing, and releasing updates might grow more problematic. That development is both a threat and an opportunity to IBM. Clients may postpone routine software projects while they weigh emerging vulnerabilities. At the same time, there may be more demand for tools that help firms patch and safeguard their software supply chains. IBM and Red Hat replied with Lightwell, a $5 billion project to fix open-source software vulnerabilities using artificial intelligence and more than 20,000 developers. The commercial edition, which IBM claimed started July 8, features a portfolio of more than 6,500 remediated and verified software dependencies. IBM's Lightwell demonstrates it's trying to turn AI disruption into a new business opportunity. Investors still need evidence that Lightwell can generate business quickly enough to offset delayed software transactions. MANDEL NGAN / Getty Images What IBM investors should watch after the crash IBM will issue its comprehensive second quarter results and outline its full-year expectations on July 22. The investor-relations schedule on the company's website shows the earnings webcast at 5 p.m. Eastern. The first is whether management stays on track with its revenue and free-cash-flow guidance. Earlier, IBM had expected revenue to climb by more than 5% in constant currency and to generate about $1 billion more in free cash flow than it did in 2025. A cut to either target would indicate that the second-quarter downturn isn't just a matter of deal timing. The second problem is the growth of software. A pick-up in transaction processing and completion of delayed contracts would confirm IBM's view that consumers essentially shifted purchases from one quarter to the next. Any such deterioration would suggest a substantial shift in corporate expenditure priorities. Investors should also monitor gross margin. If clients keep buying low-margin infrastructure rather than software, IBM could generate more revenue from servers and storage while producing weaker margins if customers continue postponing higher-margin software purchases. Key takeaways for IBM investors * IBM's preliminary second-quarter revenue increased only 1% to $17.2 billion. * Customers redirected technology budgets toward supply-constrained servers, storage and memory. * Software carries a substantially higher gross margin than IBM's infrastructure and consulting businesses. * Distributed infrastructure rose 37%, showing that IBM captured some of the hardware demand. * Weak IBM Z sales also reduced associated transaction-processing software revenue. * The July 22 earnings call should clarify whether the problem is temporary timing or a structural budget shift. The final question: Can IBM's recent acquisitions and fresh products get the wind back in its sails? Krishna stated Red Hat sped up and HashiCorp and Confluent did well. IBM's 2025 annual report outlines a bigger push to focus its portfolio on hybrid cloud, automation, analytics, and artificial intelligence. This array of assets gives IBM various opportunities to take advantage of enterprise AI adoption. They don't promise that consumers will buy IBM software before they get the CPUs and memory to run it. And that difference is why the market has punished IBM so badly. But the corporation didn't only declare reduced growth. It showed that the AI boom may throw a wrench in the timing and profitability of its own business, even as management keeps calling artificial intelligence a long-term tailwind. In the best-case scenario, clients proceeded with hardware purchases and will return for deferred software contracts later in 2026. The most serious interpretation is bearish. Enterprise AI spending might be shifting to infrastructure faster than IBM's high-margin software offerings can capture. Newer models are also threatening parts of the conventional software and consulting business. We'll have to wait for IBM's next earnings call to see which one is more accurate. The stock's unprecedented plunge revealed the risk. Artificial intelligence does not automatically benefit every technology company. In IBM's case, the buildout encouraged customers to prioritize scarce infrastructure over the higher-margin software purchases IBM expected. IBM's future returns for shareholders may rest on making sure software doesn't come second. The Arena Media Brands, LLC THESTREET is a registered trademark of TheStreet, Inc. This story was originally published July 16, 2026 at 4:00 PM.

IBM shares plunge 25% as AI spending boom hammers business: 'Ugly moment for software stocks'

IBM said it had "faltered" in keeping pace with a shift in corporate spending from software to data-center infrastructure and forecast second-quarter earnings below estimates, the clearest sign yet of AI's growing toll on the sector. The warning sent IBM's shares down 25% in trading on Tuesday, putting the stock on track for an even steeper single-day decline than it suffered during the 1987 "Black Monday" crash. Other software stocks also tumbled, dragging the Dow lower, while the iShares Expanded Tech-Software Sector ETF fell more than 4%. Software investors have long been on edge due to fears that AI tools capable of automating routine work could pose an existential threat to the industry. Tuesday's announcement showed that even the boom in spending on servers, chips and networking gear for AI was eating into software budgets. "In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases," CEO Arvind Krishna said in a letter to investors. "While we anticipated some supply-chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization," Krishna said, adding that "numerous large deals" had failed to close as expected. IBM said the weakness was largely in its mainframe business, which sells high-powered computers and software that process millions of daily transactions for industries such as banking and airlines. It also noted that businesses were prioritizing cybersecurity spending given recent breakthroughs in AI hacking abilities. Anthropic's advanced Mythos model has jolted businesses this year with its ability to expose flaws in existing software and encryption systems, pushing companies to ramp up cybersecurity. Slowing growth IBM said it expects revenue to rise just 1% to $17.2 billion in the second quarter, compared with analysts' estimate of $17.86 billion, according to data compiled by LSEG. That would mark its weakest revenue growth in more than a year. It forecast adjusted earnings per share of $2.93, compared with the estimate of $3.02. IBM sells mainframe computers, enterprise software and IT consulting services to large corporations and governments. The company has been trying to reduce its reliance on the cyclical mainframe business by focusing on its software unit including its high-margin Red Hat business, which helps firms run applications across different cloud providers. "This is an ugly moment for IBM and software stocks... the big question will be how long the shift to infrastructure and cybersecurity lasts," said Chris Beauchamp, chief market analyst at IG Group. "A few more months might be bearable, but more than that and serious questions will be asked all over again about software stocks." Microsoft, ServiceNow, Salesforce and Intuit fell between 2% and 5%. To reassure investors, IBM on Tuesday highlighted its heavy investments in quantum computing including more than $10 billion to build the first large-scale quantum computer by 2029. The technology has drawn fresh interest since the US government in May backed companies including IBM to shore up the supply chain. But IBM's quantum efforts and expanding its AI partnerships, including with OpenAI, are still in early stages and are not yet large enough to materially offset weakness in its core software and infrastructure businesses. The company is expected to report second-quarter results on July 22.

Japan IT stocks slide after IBM warns AI spending crowds out software budgets By Investing.com

Investing.com-- Japan's information technology stocks fell on Wednesday after IBM's weak revenue outlook fueled concerns that surging spending on artificial intelligence infrastructure is crowding out enterprise software budgets. IBM shares tumbled 25% overnight after warning that customers had shifted spending toward servers, storage and memory to secure AI infrastructure, with companies rushing to secure supply-constrained hardware while delaying software purchases. Get real-time updates on market-moving news with InvestingPro The company expects second-quarter revenue of about $17.2 billion, below analysts' estimates, marking its weakest sales growth in more than a year. In Tokyo, NEC Corp (TYO:6701) shares fell 5%, while Fujitsu (TYO:6702) slipped 5.5%, underperforming the broader market as investors reassessed the outlook for IT services companies exposed to corporate technology spending. BayCurrent Consulting (TYO:6532) shares dropped nearly 7%, while Nomura Research Institute (TYO:4307) declined 5%, IBM's warning heightened concerns that the AI spending boom, while boosting demand for chips and data-center equipment, could pressure software vendors as enterprises reallocate technology budgets.

IBM warns AI boom squeezing software budgets, shares sink

IBM shares plunged 25% on Tuesday after it signaled the AI infrastructure boom is drawing spending away from the software sector. Big Blue said it expected revenue to rise just 1% in the second quarter, falling short of Wall Street hopes. In a letter to investors, CEO Arvind Krishna said the firm had "faltered" in keeping pace with a shift in corporate spending from software to data-center infrastructure. He said that clients shifted their expenditure "toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases." Krishna added that "numerous large deals" had failed to close as expected. IBM sells enterprise software and IT consulting services to big business and governments. It noted that companies were also prioritizing cybersecurity spending given recent breakthroughs in AI hacking abilities. Tuesday's announcement adds to concerns over a software industry already rocked by the rise of AI tools. Software stocks Microsoft, ServiceNow, Salesforce and Intuit all fell between 1.5% and 5%.

IBM warns AI boom is squeezing software budgets, triggers sector rout

July 14 (Reuters) - IBM sparked a market rout on Tuesday after forecasting second-quarter revenue below estimates and signaling that businesses were favoring spending on data-center infrastructure over software, the starkest sign yet of AI's growing toll on the sector. Shares of Big Blue slumped 20% in premarket trading, dragging other software stocks and Dow futures lower. The iShares Expanded Tech-Software Sector ETF was last down more than 4%. Software investors have long been on edge over fears that AI tools capable of automating routine work could pose an existential threat to the industry. Tuesday's announcement showed that even the boom in spending on servers, chips and networking gear for AI was eating into software budgets. "In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases," IBM CEO Arvind Krishna said in a letter to investors. "While we anticipated some supply-chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization," Krishna said, adding that the company had "faltered" in adapting quickly enough and that "numerous large deals" had failed to close as expected. According to the preliminary results, the company expects revenue of $17.2 billion during the quarter, compared with analysts' estimate of $17.86 billion, according to data compiled by LSEG. Adjusted earnings per share is expected to be $2.93, compared with the estimate of $3.02. "This is an ugly moment for IBM and software stocks... the big question will be how long the shift to infrastructure and cybersecurity lasts," said Chris Beauchamp, chief market analyst at IG Group. "A few more months might be bearable, but more than that and serious questions will be asked all over again about software stocks." Microsoft, ServiceNow, Salesforce and Intuit fell between 3% and 5%. (Reporting by Harshita Mary Varghese in Bengaluru; Editing by Shilpi Majumdar and Saumyadeb Chakrabarty)

IBM forecasts preliminary Q2 revenue below estimates as spending shifts to AI

July 14 (Reuters) - IBM's preliminary second-quarter revenue forecast came below Wall Street estimate on Tuesday, as customers prioritized spending on AI infrastructure, including servers, storage and memory purchases, sending its shares slumping 17% in premarket trading. The results reflect an industry-wide shift in technology spending toward AI infrastructure, reducing budgets for traditional software. According to the preliminary results, the company expects revenue of $17.2 billion during the quarter, compared with analysts' estimate of $17.86 billion, according to data compiled by LSEG. Adjusted earnings per share is expected to be $2.93, compared with the estimate of $3.02. IBM CEO Arvind Krishna said in a letter to investors that in this quarter the company "faltered" in adapting quickly enough to the evolving market conditions, leading to "numerous large deals" not closing as expected. (Reporting by Harshita Mary Varghese in Bengaluru; Editing by Shilpi Majumdar)