IBM stated it was “slow” to pivot corporate spending from software toward data center infrastructure, leading to expectations for second-quarter profits that fall short of predictions. This indicates the growing impact of AI on the industry.
As a result, IBM’s stock plummeted by 25% on Tuesday, marking a sharper single-day drop than the infamous Black Monday crash back in 1987.
Other software stocks followed suit, contributing to a decline in the Dow, while the iShares Expanded Technology Software Sector ETF dropped over 4%.
Investors in software have been on edge, concerned that AI tools capable of automating routine tasks might threaten the sector’s very existence. Tuesday’s announcement highlighted that the current surge in spending on servers, chips, and networking equipment for AI is beginning to encroach on software budgets.
According to CEO Arvind Krishna, clients have been redirecting their quarterly capital expenditures in recent weeks towards server, storage, and memory purchases to ensure they secure supply-constrained infrastructure ahead of anticipated price hikes.
“While our forecasts anticipated some supply chain-related effects, we did not foresee the extent of the shift in capital investment priorities,” he noted, mentioning that “a number of large transactions” didn’t close as anticipated.
IBM identified a notable weakness in its mainframe business, which provides high-performance computers and software managing millions of transactions daily for sectors like banking and aviation.
Krishna pointed out that companies are increasingly channeling their funds into cybersecurity, influenced by recent advancements in AI hacking techniques.
slowing growth
For the second quarter, IBM predicts sales will only grow by 1% to $17.2 billion, compared to analyst projections of $17.86 billion, which would represent the lowest sales growth in over a year.
Adjusted earnings per share are expected to be $2.93, below the anticipated $3.02.
IBM offers mainframe computers, enterprise software, and IT consulting services to large enterprises and government bodies.
The company is attempting to lessen its reliance on the fluctuating mainframe sector by shifting its focus toward its software division, which includes its profitable Red Hat business, assisting companies in running applications across multiple cloud platforms.
“This is a challenging period for both IBM and software stocks… The pressing question is how long this shift to infrastructure and cybersecurity will continue,” remarked Chris Beecham, chief market analyst at IG Group.
“We might manage to stay stable for a few more months, but after that, we’ll likely find ourselves scrutinizing software stocks again.”
Shares of Microsoft, ServiceNow, Salesforce, and Intuit fell between 2% and 5%.
On Tuesday, IBM tried to ease investor concerns by underscoring its major investments in quantum computing, pledging over $10 billion to construct a large-scale quantum computer by 2029.
Interest in this technology has surged since May when the U.S. government encouraged companies like IBM to bolster supply chains.
Yet, IBM’s quantum initiatives and expanding AI partnerships, including with OpenAI, are still at an early stage and haven’t yet scaled up enough to adequately mitigate weaknesses in its core software and infrastructure areas.
The company is set to release its second-quarter financial results on July 22nd.
