Investing.com – Software stocks fell sharply on Tuesday as disappointing preliminary results from IBM (NYSE:IBM) reverberated across the industry and pushed shares of major software companies lower.
“The IBM update will deal a devastating blow to software/services stocks as investors will fear the investment shift will have a negative impact on the entire industry, but the race to secure hardware raises its own concerns,” Adam Crisafulli, an analyst at Vital Knowledge, said in a brief commentary.
Following IBM’s update, investors reacted sharply to cooled sentiment in the broader software space:
Accenture (NYSE:ACN): Down 7%
ServiceNow (NYSE:NOW): Down 8%
Workday (NASDAQ:WDAY): Down 9.7%
Salesforce (NYSE:CRM): Down 6%
Atlassian Corp Plc (NASDAQ:TEAM): Down 8.3%
SAP SE ADR (NYSE:SAP): fell 5.5%
Adobe NASDAQ:ADBE): Down 6.1%
The decline is due to a fundamental shift in corporate capital expenditure (capex) caused by a global storage shortage. This dynamic is particularly damaging to software stocks for the following reasons:
Re-prioritization of investments: IBM reported that towards the end of June, its customers – faced with a supply-constrained market – shifted their spending from software and general IT to “captive” hardware such as servers, storage and memory. As storage prices have skyrocketed – compounded by strong demand from AI data centers – companies are exhausting their budgets just to secure critical hardware.
The AI tax on corporate budgets: The industry is currently experiencing a “structural” memory shortage. Hyperscalers and AI infrastructure providers consume most of the high-bandwidth memory (HBM) and DRAM production. If companies manage to secure hardware, they pay significantly higher premiums and leave less room in their annual budgets for software renewals, licenses or new digital transformation projects.
Near-term revenue headwinds: Investors fear this isn’t an isolated case for IBM. When large enterprise customers delay software purchases to prioritize hardware inventory – a trend called “capex reprioritization” – it portends a near-term revenue slowdown for the entire software-as-a-service (SaaS) and consulting sectors.
IBM’s revenue of $17.2 billion missed the consensus of $17.86 billion, while non-GAAP EPS of $2.93 fell short of the estimate of $3.02. Beyond shifting hardware purchasing, the company noted:
Infrastructure collapse: The performance decline was concentrated in the Z-series mainframe division and the associated transaction processing software stack.
External distractions: IBM said customers were also distracted from software investment decisions during the quarter by pressing, industry-wide cybersecurity concerns that likely took precedence over other planned software spending.
(Louis Juricic contributed to this reporting.)
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