IBM’s shares plunged 25% on Tuesday, marking its steepest single-day decline since 1987, after the company issued a profit warning for the second quarter. CEO Arvind Krishna attributed this to an unexpected shift in client spending during the last weeks of June, where companies diverted capital expenditure towards servers, storage, and memory to secure supply-constrained infrastructure ahead of anticipated price increases. This reprioritization significantly impacted mainframe sales and led to numerous large software deals failing to close as expected.
IBM expects Q2 revenue to increase by only 1% to $17.2 billion, falling short of analysts' estimates of $17.86 billion. Adjusted earnings per share are projected at $2.93, below the estimated $3.02. The company also anticipates a 7% decline in infrastructure revenue, compared to an expected 3% drop. The warning highlights a broader trend where businesses are redirecting funds from software to hardware, driven by the AI boom and heightened demand for cybersecurity in light of new AI hacking capabilities, exemplified by Anthropic's Mythos model.
The market reaction saw $70 billion wiped from IBM's $272.78 billion market valuation. Other software companies like Microsoft, ServiceNow, Salesforce, and Intuit also experienced declines of 2% to 5%. Analysts, such as Chris Beauchamp of IG Group, described it as an "ugly moment for IBM and software stocks" and questioned how long this shift towards infrastructure and cybersecurity spending would last. IBM acknowledged its failure to adapt quickly enough to this shift in corporate spending priorities.
While IBM pointed to significant long-term investments, such as over $10 billion in quantum computing with a goal of building a large-scale quantum computer by 2029, these efforts are still in early stages and are not yet substantial enough to offset the current weaknesses in its core software and infrastructure businesses. The company is set to report its full second-quarter results on July 22, with the central question being whether deferred deals will eventually materialize or if this marks a sustained repricing of the software sector. HSBC has already downgraded the stock.
