IBM shares plunged more than 25% on Tuesday after the US tech giant issued a profit warning and released disappointing preliminary second-quarter results. The stock was on track for a steeper single-day decline than the 1987 'Black Monday' crash.
Profit Warning and Revenue Miss
IBM reported revenue of $17.2bn for the three months ending in June, up just 1% year-over-year, significantly below analyst forecasts of $17.86bn. Adjusted earnings per share were $2.93, compared to the expected $3.02. The company blamed shifts in corporate customers' spending away from software toward datacentre infrastructure and cybersecurity.
Arvind Krishna, IBM chief executive, said in a letter to investors: '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.' He added that 'numerous large deals' had failed to close as expected.
Impact on Broader Software Sector
The warning triggered a selloff in the broader software sector on Tuesday. Microsoft, ServiceNow, Salesforce and Intuit fell between 3% and 5%. Chris Beauchamp, chief market analyst at IG Group, said: 'This is an ugly moment for IBM and software stocks ... the big question will be how long the shift to infrastructure and cybersecurity lasts.'
The global rush by tech companies to build out artificial intelligence infrastructure has sent demand for servers, memory chips and storage soaring, driving up prices and creating supply shortages. IBM noted that many big corporate customers rushed to buy hardware to get ahead of expected price increases, pulling spending away from IBM's higher-margin mainframe computers and related software, which process millions of daily transactions for industries such as banking and airlines.
AI and Cybersecurity Concerns
IBM also highlighted that businesses were prioritizing cybersecurity spending given recent breakthroughs in AI hacking abilities. Software investors have long been on edge over fears that AI tools capable of automating routine work could pose an existential threat to the industry. Beauchamp added: 'A few more months might be bearable, but more than that and serious questions will be asked all over again about software stocks.'
