IBM Crashes 25% After Warning of Weak Revenue as AI Infrastructure Spending Squeezes Software Budgets

Mumbai, July 15: International Business Machines (IBM) has forecast second-quarter revenue below Wall Street estimates, signalling that the rapid shift in enterprise spending towards artificial intelligence (AI) infrastructure is weighing on demand for its software and traditional infrastructure businesses. The disappointing outlook triggered a sharp selloff in the company’s shares, dragging down the broader technology sector.  

IBM said second-quarter revenue is expected to be $17.2 billion, representing growth of just about 1% year-on-year. The company also projected adjusted earnings of $2.93 per share, missing expectations again. IBM is scheduled to report its full second-quarter results on July 22.  

The weak guidance came as an unpleasant surprise to investors, sending IBM shares tumbling by around 25%. The sharp decline also weighed on other software companies as investors reassessed whether the AI spending boom could temporarily divert corporate technology budgets away from software and consulting services.  

AI spending reshapes enterprise technology budgets 

IBM stock movement across three months. Source: NYSE 

Chief Executive Officer Arvind Krishna said many enterprise customers have been prioritising investments in AI-related hardware such as servers, networking equipment and semiconductors, amid ongoing supply constraints and concerns over future price increases. 

As companies rushed to secure AI infrastructure, several planned software purchases and large enterprise deals were delayed, hurting IBM’s quarterly performance. Krishna acknowledged that IBM did not anticipate the magnitude of this spending shift and admitted the company “faltered” in adapting quickly enough to changing customer priorities.  

The trend highlights one of the unintended consequences of the global AI investment cycle. While businesses continue to spend heavily on AI, a larger share of technology budgets is currently being allocated to foundational infrastructure rather than enterprise software applications. 

Large deals failed to close 

IBM also said several major customer contracts that it had expected to close during the final weeks of June failed to materialise on schedule, further contributing to the revenue miss. 

According to management, delayed deal closures were particularly evident in parts of the company’s business, including its mainframe segment. The slower conversion of large contracts compounded the impact of changing customer spending priorities during the quarter.  

The company also pointed to rising cybersecurity spending as another factor affecting customer budgets, as businesses increased investments to counter emerging AI-enabled cyber threats. 

Software companies face near-term pressure 

The warning from IBM has raised broader concerns across the enterprise software industry. 

Investors worry that although AI remains a major long-term growth opportunity, the immediate spending cycle may favour hardware manufacturers, semiconductor companies and data-centre providers over software vendors. 

As organisations invest heavily in AI infrastructure—including graphics processors, servers, storage and networking equipment—they may temporarily postpone software upgrades and discretionary technology projects until those infrastructure investments are completed.  

The development triggered weakness across several software stocks as the market reassessed earnings expectations for companies exposed to enterprise IT spending. 

AI ambitions yet to offset legacy weakness 

IBM has spent the past several years repositioning itself as an AI and hybrid cloud company following its acquisition of Red Hat and investments in generative AI, quantum computing and enterprise software. 

The company has also expanded partnerships with leading AI firms, including OpenAI, while integrating AI capabilities across its consulting and software businesses. However, these newer initiatives are still not large enough to fully offset weakness in IBM’s traditional software and infrastructure operations.  

Despite continued investment in AI technologies, IBM remains heavily exposed to enterprise IT spending cycles, making it vulnerable when customers defer software purchases or delay large transformation projects. 

Investors await full earnings 

Market participants will now closely watch IBM’s official second-quarter earnings release on July 22 for greater clarity on customer spending patterns, the pipeline for large enterprise deals and the outlook for the remainder of the year. 

Analysts will also look for updates on the company’s AI strategy, software demand, consulting business and the pace of enterprise adoption of generative AI solutions. 

While the current weakness appears tied to a temporary reallocation of technology budgets rather than a collapse in overall IT spending, IBM’s warning has highlighted a key challenge facing the software industry: the AI investment boom is reshaping how corporate technology budgets are allocated, creating near-term pressure even for established enterprise software providers.  

Source

•  NYSE