IBM's shares plunged by as much as 25% in premarket trading on Tuesday, marking one of its worst-ever single-day declines. This drastic fall followed the company's preliminary second-quarter results, which revealed expected revenue of $17.2 billion and adjusted earnings per share of $2.93, both below analyst forecasts of $17.86 billion and $3.02 respectively. CEO Arvind Krishna attributed the shortfall to customers globally redirecting their capital expenditure towards servers, storage, and memory necessary for AI infrastructure, prioritizing these over software and services.
This unexpected shift in spending caught IBM off guard, with Krishna admitting in a letter to investors that the company "faltered" in adapting quickly enough and that "numerous large deals" failed to close. The impact was not limited to IBM; the news triggered a broader sell-off across the software and IT services sectors. Microsoft Corp. fell 3%, Workday Inc. dropped 10%, Oracle Corp. fell 2.1%, Salesforce Inc. shed 6.2%, and Autodesk Inc. slid 5%. The iShares Expanded Tech-Software Sector ETF, a key indicator for the sector, slumped 4.5%.
Analysts reacted strongly, with Chris Beauchamp of IG Group calling it an "ugly moment for IBM and software stocks." Adam Crisafulli, founder of Vital Knowledge, stated that IBM's results would deliver a "devastating blow to software/services stocks" amid concerns about the capex pivot's impact on the entire industry. This situation highlights a growing divide in the technology sector, where companies building AI infrastructure, like chipmakers and cloud providers, are benefiting, while software companies face pressure as AI investment competes directly with their budgets.
