IBM shares plunge 24% after surprise profit warning as corporate AI spending shifts to hardware

The profit warning

IBM stunned markets on Tuesday with a surprise profit warning, revealing that second-quarter revenue would fall well short of analyst expectations. The company reported preliminary revenue of $17.2 billion, a 1% increase year-on-year but significantly below the $17.86 billion to $17.9 billion that analysts had forecast. Adjusted earnings per share came in at $2.93, compared with the $3.02 estimate compiled by LSEG. The shortfall was concentrated in the infrastructure division, where sales dropped 7%, far worse than the low single-digit decline Wall Street had expected. Software revenue rose 5%, but that growth was not enough to offset the infrastructure weakness.

In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases.

CEO acknowledges missteps

IBM CEO Arvind Krishna was unusually candid in a letter to investors, admitting the company had failed to anticipate the scale of the spending shift. He noted that while IBM had expected some supply-chain related impact, it did not foresee the magnitude of the reprioritisation. Krishna conceded that the company had faltered in adapting quickly enough and that numerous large contracts had not closed within the expected timeline, which he identified as the primary cause of the weaker performance.

These conditions require our teams to execute flawlessly, and this quarter we did not meet that challenge.

Market reaction

The stock fell as much as 25% in morning trading to around $220 per share, making it the worst single-day drop since the Black Monday crash of 1987. The selloff was not confined to IBM: the iShares Expanded Tech-Software Sector ETF dropped more than 4%, and the Dow Jones Industrial Average was dragged lower, declining 0.16% while the Nasdaq Composite gained 0.52% and the S&P 500 added 0.18%. The divergence reflected a rotation within technology: chip and memory stocks benefited from the same infrastructure spending wave that punished software names.

This is an ugly moment for IBM and software stocks... the big question will be how long the shift to infrastructure and cybersecurity lasts. A few more months might be bearable, but more than that and serious questions will be asked all over again about software stocks.

The AI spending pivot

The episode exposes a structural tension in enterprise technology spending. Companies have been pouring tens of billions of dollars into AI data centre infrastructure, driving up prices for memory chips and creating supply bottlenecks. Facing expected price increases, corporate buyers accelerated hardware purchases in late June, diverting budgets that might otherwise have gone to software contracts. IBM, which has spent heavily on software acquisitions including Red Hat, HashiCorp and Confluent to reposition itself as a software-led company, found itself on the wrong side of that trade. Krishna had framed the Confluent acquisition in December as an opportunity to deploy generative AI and autonomous agent systems faster, but the near-term spending cycle is flowing toward the physical layer of computing.

Broader market context

The IBM shock landed on a day when broader market sentiment received a boost from better-than-expected US inflation data for June. Both headline and core inflation rates came in below Wall Street forecasts, easing pressure on bond yields and the US dollar. Major bank earnings from JPMorgan, Goldman Sachs, Bank of America, Citigroup and Wells Fargo all beat revenue and profit expectations, buoyed by strong equity trading, investment banking activity and robust loan demand. Despite those beats, most bank stocks traded slightly lower except Goldman Sachs. Oil prices remained elevated due to ongoing hostilities between the United States and Iran.

What comes next

IBM is scheduled to report full second-quarter results on 22 July, when investors will scrutinise whether the spending shift represents a one-quarter aberration or the beginning of a longer-term headwind for software companies. The preliminary disclosure has already fuelled concerns that AI infrastructure is being over-ordered and that actual end-demand may be overestimated, a worry that could weigh on technology valuations beyond IBM's own share price.