IBM plummets 22% as AI hardware spend cannibalizes software budgets
IBM's preliminary second-quarter revenue missed estimates as customers diverted software budgets to secure AI hardware, triggering a historic selloff that dragged down the broader enterprise software sector.
IBM shares plunged 22% in pre-market trading on Tuesday after the company reported preliminary second-quarter revenue of $17.2 billion, falling short of analysts' estimates of $17.9 billion. If the losses hold through the closing bell, the stock will post its largest intraday decline since the 1980s. The company is scheduled to report its final results on July 22.
In a letter to investors, Chief Executive Arvind Krishna attributed the shortfall to an unexpected shift in customer spending habits. Rather than buying IBM's software and infrastructure offerings, clients are aggressively purchasing servers, storage, and memory components to hedge against anticipated price increases.
Krishna noted that IBM had anticipated supply chain disruptions, specifically memory chip shortages fueled by the artificial intelligence boom. However, management failed to predict that these hardware constraints would actively cannibalize the company's software budgets. IBM's infrastructure division suffered a 7% sales decline during the quarter.
The ripple effects of this budget reallocation extended far beyond IBM, signaling a potential sector-wide reckoning. Shares in enterprise software peers Workday and ServiceNow fell more than 8% and 7.7%, respectively. The simultaneous drops suggest investors are pricing in the risk that surging capital expenditures on AI infrastructure are coming directly at the expense of enterprise software allocations.
This dynamic validates long-standing investor anxieties regarding AI's impact on the software sector. While IBM and its peers have integrated AI into their own products to drive efficiency, the immediate market reaction reflects a fear that physical AI builds are starving legacy software vendors of revenue. Tuesday's selloff echoes pressure IBM faced in February, when AI startup Anthropic PBC unveiled a tool to modernize a legacy programming language heavily used on IBM mainframes.
The sharp downturn marks a dramatic reversal for a stock that had been a reliable outperformer. Between May 2023 and November 2025, IBM shares rallied 139% from $128.59 to $308, delivering positive annual returns for five consecutive years. The current slump has erased 25% of the company's valuation year-to-date, accelerating after a 6% drop in June and intensified selling in July.
IBM cautioned that it is still reviewing its books, meaning final figures could differ slightly from Tuesday's preliminary release. Regardless of minor adjustments, the underlying message for market professionals is clear: the fierce demand for AI physical infrastructure is currently inflicting collateral damage on enterprise software demand.
