The technology giant shocked investors after warning that second-quarter revenue would likely fall short of Wall Street expectations, citing a surge in customer spending on AI infrastructure such as servers, storage systems and memory rather than software. The announcement sent IBM's stock plunging about 22% and sparked a broader selloff across the software sector.
The warning underscores how the rapid expansion of AI is reshaping corporate technology spending. As companies race to build the infrastructure needed to support AI applications, many are delaying or reducing investments in software, creating new challenges for firms that have traditionally relied on enterprise software sales.
IBM acknowledged that it had struggled to keep pace with the changing market dynamics.
"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," IBM Chief Executive Officer Arvind Krishna said in a letter to investors.
"While we anticipated some supply-chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization," Krishna said, adding that the company had "faltered" in adapting quickly enough and that "numerous large deals" had failed to close as expected.
According to IBM's preliminary financial results, the company expects second-quarter revenue of approximately $17.2 billion, well below analysts' average estimate of $17.86 billion, based on data compiled by LSEG. Adjusted earnings per share are projected at $2.93, also missing analysts' forecast of $3.02.
The disappointing outlook rattled investors across the technology industry. Dow futures slipped following the announcement, while the iShares Expanded Tech-Software Sector ETF dropped more than 4%, reflecting concerns that the shift toward AI infrastructure spending could weigh on software companies for longer than previously expected.
Several major software firms were caught in the broader market decline. Shares of Microsoft, ServiceNow, Salesforce and Intuit each fell between 3% and 5% as investors reassessed the outlook for enterprise software demand.
Market analysts say the AI investment cycle is creating a temporary but significant reallocation of corporate technology budgets, with companies prioritizing the hardware needed to power AI systems before expanding spending on software.
"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."
For months, investors have expressed concerns that AI-powered tools capable of automating routine business tasks could eventually reduce demand for traditional software products. IBM's latest warning provides one of the clearest indications yet that the AI spending boom is already affecting software companies, not only through changing customer priorities but also by redirecting technology budgets toward data centre infrastructure.
IBM is scheduled to release its full second-quarter financial results on July 22, when investors will be looking for further details on how long the spending shift is expected to persist and what it could mean for the company's outlook for the rest of the year.