IBM Shares Tumble After AI Investment Shift Weighs on Software Demand

Key Takeaways

• IBM forecast weaker-than-expected second-quarter revenue and earnings.

• Customers shifted IT budgets from software to AI infrastructure purchases.

• IBM shares fell 25%, marking one of the company's steepest single-day declines.

• The weakness was concentrated in IBM's mainframe business as several large deals failed to close.

• The warning weighed on broader software stocks including Microsoft, Salesforce, ServiceNow and Intuit.

What Happened

IBM warned investors that a rapid shift in enterprise technology spending toward AI infrastructure has weighed on demand for its software and mainframe offerings, prompting the company to lower its second-quarter expectations.

The company said customers increasingly prioritized purchases of servers, storage, memory and networking equipment to secure supply-constrained AI infrastructure ahead of anticipated price increases. According to Chief Executive Arvind Krishna, the shift became particularly pronounced during the final weeks of June, leading to several large enterprise deals being delayed or failing to close before the end of the quarter.

IBM now expects second-quarter revenue of approximately $17.2 billion, representing about 1% year-over-year growth, below analysts' consensus estimate of $17.86 billion, according to LSEG. The company also forecast adjusted earnings per share of $2.93, compared with analysts' expectation of $3.02.

Why It Matters

IBM's warning provides one of the clearest indications that the global race to deploy artificial intelligence infrastructure is reshaping enterprise technology spending.

Rather than expanding overall IT budgets, many organizations appear to be reallocating capital toward AI-ready data centers, specialized chips and networking hardware. That shift may temporarily pressure software vendors as customers postpone application upgrades and other discretionary technology investments.

The announcement also highlights broader concerns facing the software industry as generative AI tools automate coding, software development and other enterprise workflows while companies simultaneously increase cybersecurity spending to address emerging AI-related threats.

Key Details

• Expected Q2 revenue: $17.2 billion

• Analyst consensus revenue: $17.86 billion (LSEG)

• Expected adjusted EPS: $2.93

• Analyst consensus EPS: $3.02

• Revenue growth outlook: 1% year over year

• IBM cited delayed enterprise software and mainframe deals.

• Customers prioritized spending on:

  • AI servers

  • Storage systems

  • Memory

  • Networking infrastructure

  • Cybersecurity

IBM also reaffirmed its long-term commitment to emerging technologies, highlighting plans to invest more than $10 billion toward developing a large-scale quantum computer by 2029. The company said its quantum computing initiatives and expanding AI partnerships, including collaborations with OpenAI, remain in the early stages and are not yet significant enough to offset weakness in its core businesses.

Market Impact

IBM shares plunged 25% following the announcement, putting the stock on track for one of its largest single-day percentage declines on record and erasing roughly $70 billion in market value if losses hold.

The warning also pressured the broader software sector, with shares of Microsoft, ServiceNow, Salesforce, and Intuit falling between 2% and 5% as investors assessed whether AI infrastructure spending is beginning to crowd out traditional enterprise software budgets.

IBM is scheduled to report its full second-quarter financial results on July 22, when investors are expected to seek further clarity on customer spending trends and the outlook for enterprise software demand.

Conclusion

IBM's revised outlook underscores how the accelerating build-out of AI infrastructure is altering corporate technology spending priorities. While demand for AI hardware and cybersecurity solutions remains robust, the company said software purchases and large enterprise transactions slowed as customers redirected budgets toward securing critical infrastructure. Investors will look to IBM's upcoming earnings report for additional insight into whether the shift represents a temporary reallocation of spending or a longer-lasting trend across enterprise IT.