IBM shares experienced a dramatic sell-off, plummeting 25% on Tuesday, putting the company on track for its worst single-day decline since at least 1968, surpassing the "Black Monday" crash of 1987. This rout wiped out $70 billion from its market valuation of $272.78 billion. The plunge was triggered by an extraordinary warning from CEO Arvind Krishna, who stated that IBM "faltered" in adapting to a rapid shift in corporate spending away from software and towards data center infrastructure, such as servers, storage, and memory, needed for artificial intelligence. This shift was more significant than anticipated, leading to numerous large deals failing to close.
IBM disclosed preliminary second-quarter results that fell short of expectations. The company projects revenue to rise just 1% to $17.2 billion, below analysts' estimates of $17.86 billion. Adjusted earnings per share are forecast at $2.93, missing the $3.02 estimate. This marks the weakest revenue growth in over a year for IBM, with its infrastructure division experiencing a 7% decline. Krishna attributed much of the shortfall to weakness in the mainframe business, whose high-powered computers and software are critical for banking and airlines.
The unexpected budget reprioritization, driven by companies' urgent need to secure AI infrastructure ahead of anticipated price increases, has created a ripple effect across the software industry. Other major software companies, including Microsoft, Salesforce, ServiceNow, Workday Inc., and Intuit, saw their shares fall between 2% and 6%. Analysts, such as Chris Beauchamp of IG Group and Anurag Rana of Bloomberg Intelligence, expressed concern about the longevity of this spending shift and its implications for the broader software sector, signaling that deteriorating discretionary IT spending might be a theme for forthcoming earnings reports.
IBM's challenges are compounded by the emergence of powerful AI tools like Anthropic's Mythos model, which can expose software flaws and enhance AI hacking abilities, prompting companies to prioritize cybersecurity spending. While IBM has made significant investments in quantum computing and expanded AI partnerships, these initiatives are still in early stages and not yet substantial enough to offset the current weaknesses in its core software and infrastructure businesses. The company is set to report its final second-quarter results on July 22.
