IBM shares fell about 25 percent on Tuesday after the company unexpectedly reported preliminary second-quarter results that fell short of Wall Street’s expectations, raising concerns about how quickly rising artificial intelligence infrastructure costs are reshaping companies’ technology budgets.
The decline reduced IBM’s market capitalization by nearly $68 billion and represented the company’s largest daily loss in value. The stock was also headed for its largest percentage decline since 1987.
IBM expects second-quarter revenue of $17.2 billion, up 1 percent from a year earlier, and adjusted earnings of $2.93 per share. Analysts had expected revenue of about $17.86 billion and profit of $3.01 per share.
The company stressed that these numbers are preliminary and could change slightly when IBM reports its full second-quarter results on July 22.
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Customers are redirecting their spending towards scarce infrastructure
IBM CEO Arvind Krishna attributed much of the deficit to an abrupt shift in customer investments in the final weeks of June.
Enterprise customers shifted spending toward servers, storage and memory to protect their supply-constrained infrastructure from expected price increases. This reprioritization reduced spending on IBM’s Z mainframes and associated transaction processing software.
“While our expectations included some supply chain impact, we did not anticipate the extent of the re-prioritization of capital spending,” Krishna wrote in a letter to investors.
IBM’s infrastructure revenue fell 7 percent, driven in part by weaker-than-expected performance in its Z mainframe business and its related software stack. Software revenue increased 5 percent, while consulting revenue remained essentially flat.
The company also acknowledged internal execution issues. Several large deals failed to close during the quarter, and Krishna said IBM did not adapt quickly enough to changing customer priorities.
AI spending moves between technology levels
The results do not necessarily indicate that companies are reducing their commitment to artificial intelligence overall. Instead, they show how spending moves between different layers of the technology stack.
Companies facing shortages and rising prices for memory, servers, and storage can accelerate infrastructure purchases while delaying software, consulting, and modernization projects.
This change impacts the entire enterprise technology supply chain. Hardware manufacturers could see accelerated demand, while software and service providers face delayed purchasing decisions, even as customers continue to pursue AI programs.
IBM’s warning also pressured other technology stocks on Tuesday, including ServiceNow, Salesforce, Microsoft and Oracle, as investors considered whether the shift in spending extends beyond IBM.
IBM will report its full financial results and updated outlook on July 22
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