By Elsie Kamsiyochi
International Business Machines (IBM) suffered one of the steepest share price declines in its history after warning that a rapid shift in corporate technology spending toward artificial intelligence (AI) infrastructure has significantly weakened demand for its software and mainframe businesses.
The technology giant forecast second-quarter revenue and earnings below Wall Street expectations, revealing that many large customer contracts failed to close before the end of the quarter as businesses redirected spending to AI-related hardware such as servers, storage systems, memory chips, and networking equipment.
The disappointing outlook triggered a sharp market reaction, with IBM shares plunging as much as 26% during Tuesday trading. The decline marked the company’s worst single-day stock performance in decades and exceeded the losses it experienced during the infamous 1987 “Black Monday” market crash. The sell-off also spread across the broader software sector, dragging major technology stocks lower and weighing on the Dow Jones Industrial Average.
Chief Executive Officer Arvind Krishna acknowledged that IBM underestimated the speed and scale of the spending shift. In a letter to investors, he explained that customers increasingly prioritized investments in AI infrastructure as they rushed to secure hardware supplies before expected price increases and ongoing supply shortages.
According to Krishna, IBM had anticipated some disruption related to supply chain constraints, but the company did not expect businesses to reallocate so much of their technology budgets away from software projects. As a result, several significant contracts that IBM expected to finalize before the quarter ended were delayed or failed to close altogether.
The slowdown was particularly evident in IBM’s traditional mainframe business, which remains a major source of revenue. Mainframe systems are widely used by banks, airlines, governments, and other large organizations to process millions of critical transactions every day. While these systems continue to play an essential role, many customers are now directing more of their capital toward building AI-ready data centers instead of upgrading existing enterprise software.
Another factor affecting customer spending has been the growing urgency around cybersecurity. Businesses have accelerated investments in digital security following rapid advances in AI-powered hacking tools capable of identifying weaknesses in software and encryption systems.
Industry experts say recent breakthroughs in artificial intelligence have fundamentally changed corporate technology priorities. Instead of focusing primarily on software upgrades and digital transformation projects, many companies are investing heavily in computing infrastructure capable of supporting advanced AI applications. This shift has created new challenges for software vendors that rely on steady enterprise technology spending.
IBM now expects second-quarter revenue of approximately $17.2 billion, representing growth of just 1% from a year earlier and falling below analysts’ expectations of $17.86 billion. The company also forecast adjusted earnings per share of $2.93, missing Wall Street estimates of $3.02.
The weaker guidance suggests IBM is experiencing its slowest revenue growth in more than a year, highlighting the growing impact of changing corporate investment priorities across the technology sector.
For years, IBM has worked to reduce its dependence on the cyclical mainframe business by expanding its software operations, particularly through Red Hat, the cloud computing company it acquired to strengthen its hybrid cloud strategy. Red Hat has become one of IBM’s most profitable businesses by helping organizations run applications across multiple cloud platforms.
However, even those software investments have not been enough to offset the broader slowdown as customers temporarily divert spending toward AI infrastructure and cybersecurity.
Market analysts believe IBM’s results could signal broader challenges for the software industry.
Chris Beauchamp, Chief Market Analyst at IG Group, described the earnings warning as a difficult moment not only for IBM but for software companies across the sector. He noted that investors will closely monitor whether the shift toward AI infrastructure proves temporary or develops into a longer-term trend that reshapes enterprise technology spending.
The negative sentiment spread quickly across Wall Street, with shares of Microsoft, ServiceNow, Salesforce, and Intuit all declining as investors reassessed growth expectations for enterprise software companies.
Despite the disappointing quarter, IBM emphasized that it continues investing aggressively in future technologies. The company highlighted plans to spend more than $10 billion developing the world’s first large-scale quantum computer by 2029, positioning itself for the next major wave of computing innovation.
IBM also continues expanding its artificial intelligence partnerships, including collaborations with OpenAI, while developing its own AI solutions for enterprise customers. Nevertheless, executives acknowledged that these emerging businesses remain in their early stages and are not yet large enough to compensate for weakness in the company’s core operations.
Investors are now looking ahead to IBM’s full second-quarter earnings report, scheduled for July 22, for further insight into whether the current slowdown reflects a temporary shift in spending or the beginning of a more significant transformation in the enterprise software market.
The results could also provide an important indication of how the AI investment boom is reshaping the technology industry, as businesses increasingly prioritize building the infrastructure needed to support next-generation artificial intelligence over traditional software purchases.
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