This "will rattle many": IBM stock tanks as AI budgets shift
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IBM CEO Arvind Krishna attends a Rose Garden Club event at the White House on July 6. Photo: Mandel NGAN / AFP via Getty Images
IBM startled investors Tuesday with an acknowledgment that shifting priorities in the AI economy are bludgeoning its core business.
- The company's stock plunged as much as 26%, its worst intraday showing since at least 1968, per Bloomberg.
Why it matters: The software industry is suffering as companies shift their tech spending from conventional software to AI tokens and data centers.
Driving the news: IBM CEO Arvind Krishna delivered a preliminary look at the company's second-quarter earnings, saying IBM had "faltered" in adapting to the AI spending shift.
- "We did not anticipate the magnitude of the capex reprioritization," Krishna said in a letter to shareholders, noting that clients were also "distracted" with cybersecurity needs driven by emergent AI threats.
- "This a major miss that will rattle many," Baird managing director Ted Mortonson tells Axios in an email.
Threat level: Krishna said the rising costs of chips left less room for IBM's bread and butter: mainframes and software.
- "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," Krishna said.
Zoom in: IBM saw this play out with sales in its Z platform, mainframes that process many of the world's financial transactions, airline reservations and other mission-critical computing workloads.
- IBM launched the newest generation of the platform, the AI-focused z17, in 2025, in what it called its strongest second quarter launch in company history. But Tuesday, Krishna noted a "shortfall" in sales in the recent quarter.
- The results suggest more customers are deferring purchases, with Krishna noting that "numerous large deals failed to close on the timelines we expected."
By the numbers: IBM's software revenue is expected to rise 5%, compared with Wall Street's expectation of 10%, according to Evercore ISI analysts.
- Infrastructure revenue is expected to fall 7%, compared with expectations of a 3% decline.
Yes, but: While software spending is under pressure, AI spending is increasingly under scrutiny, as well.
- Companies are implementing AI usage caps and shifting toward lower-cost models to preserve budgets, according to UBS analyst Taylor McGinnis.
What we're watching: Whether IBM can fill the gaps with new sources of revenue, such as quantum computing.
- The company recently announced plans to partner with the U.S. Department of Commerce to build Anderon, matching $1 billion in federal funding to build the quantum wafer foundry.
- Krishna said IBM is also "on track to deliver the first large-scale fault-tolerant quantum computer by 2029."
The bottom line: The AI economy is starting to claim some victims.
