IBM drops 25% on profit warning as AI capex eats software budgets
IBM shares lost a quarter of their value after a profit warning revealed corporate tech budgets are shifting abruptly from software to constrained AI hardware, triggering a broader sector selloff.
IBM shares plunged more than 25% on Tuesday after the technology group warned that a sudden shift in corporate spending away from software and towards artificial intelligence infrastructure will weigh heavily on its second-quarter results.
The company expects revenue of $17.2 billion for the three months ending in June, up just 1% year-over-year but missing analyst forecasts of $17.86 billion. Adjusted earnings per share are projected at $2.93, falling short of the $3.02 consensus estimate.
The shortfall reflects a rapid, late-quarter reallocation of enterprise budgets. Chief Executive Arvind Krishna told investors that in the final weeks of June, clients redirected their quarterly capital expenditure toward servers, storage, and memory. A global rush by tech companies to build out AI infrastructure has sent demand for these components soaring, creating acute supply shortages across the industry.
Businesses are racing to secure available hardware ahead of anticipated price hikes. However, this pivot drained critical spending away from IBM’s higher-margin mainframe computers and associated software, which the company had been counting on to drive growth. IBM relies on these legacy systems to process millions of daily transactions for the banking and airline industries.
Krishna noted that numerous large software and mainframe deals failed to close as expected during the quarter. Furthermore, he said businesses were prioritizing cybersecurity spending given recent breakthroughs in AI-powered hacking capabilities, further squeezing IBM's traditional software revenues.
The profit warning sent shockwaves through the broader software market, indicating that the massive AI hardware buildout is actively cannibalizing legacy software budgets. Microsoft, ServiceNow, Salesforce, and Intuit all dropped between 3% and 5% as investors reassessed sector valuations.
The sharp selloff underscores deepening investor anxiety over how the AI boom will structurally reshape enterprise tech spending. Software investors have long feared that AI tools capable of automating routine work could pose an existential threat to the industry.
“This is an ugly moment for IBM and software stocks ... the big question will be how long the shift to infrastructure and cybersecurity lasts,” said Chris Beauchamp, chief market analyst at IG Group. “A few more months might be bearable, but more than that and serious questions will be asked all over again about software stocks.”
