IBM Shares Plunge 25% on AI-Led Spending Shift; Software Sector Rout Deepens

IBM suffered its worst single-day stock decline in decades Tuesday after the company disclosed that corporate clients are abruptly redirecting spending from software and mainframe systems to AI hardware and cybersecurity, a shift that triggered a massive profit warning and sent shockwaves through the technology sector.

Shares of International Business Machines Corp. collapsed 25% on the day, putting the stock on track for a steeper single-day drop than its 1987 "Black Monday" crash, according to multiple reports. The New York Post reported that shares sank as much as 27% in intraday trading, the biggest single-day drop since at least 1968. The rout wiped roughly $70 billion from IBM's $272.78 billion market capitalization, based on data from Reuters.

The warning came from CEO Arvind Krishna in a letter to investors, in which the company admitted it had "faltered" in adapting to the shift. "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 wrote. "While we anticipated some supply-chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritisation." He added that "numerous large deals" had failed to close as expected.

The weakness was concentrated in IBM's mainframe business, which sells high-power computers and software that process millions of daily transactions for banking, airlines and other industries. Fox Business reported that the shortfall was specifically tied to the Z mainframe line, including the flagship z17 system, described as a "transaction processing powerhouse" with embedded AI for real-time fraud detection. Krishna said the mainframe program had the strongest start in company history but then deteriorated sharply.

IBM also cited a surge in cybersecurity spending as a factor. The company noted that businesses are prioritizing security investments after recent breakthroughs in AI hacking capabilities. The Anthropic Mythos model, an advanced AI system, has demonstrated the ability to expose flaws in existing software and encryption systems, pushing companies to ramp up defenses, according to Reuters and other sources.

The financial impact was severe. IBM said it expects second-quarter revenue to rise just 1% to $17.2 billion, compared with the analyst consensus of $17.86 billion compiled by LSEG. That would mark the weakest revenue growth in more than a year. The company forecast adjusted earnings per share of $2.93, versus the $3.02 estimate. Fox Business reported adjusted earnings of $2.93 per share on revenue of $17.2 billion, missing Wall Street estimates of $3.01 per share and $17.86 billion. The company is expected to report full second-quarter results on July 22.

The warning triggered a broad sell-off in software stocks. Microsoft, ServiceNow, Salesforce and Intuit each fell between 2% and 5%, according to Reuters. The iShares Expanded Tech-Software Sector ETF dropped more than 4%, as reported by India Today. The Dow Jones Industrial Average sank 0.19% to 52,401.14, dragged lower by IBM, even as the S&P 500 and Nasdaq Composite rose on strength in bank stocks and cooler inflation data, according to Nasdaq.com. The Nasdaq reported that the Dow's decline was "thanks mostly to one name" — IBM.

"This is an ugly moment for IBM and software stocks... the big question will be how long the shift to infrastructure and cybersecurity lasts," said Chris Beauchamp, chief market analyst at IG Group, as quoted by multiple outlets. "A few more months might be bearable, but more than that and serious questions will be asked all over again about software stocks."

To reassure investors, IBM highlighted its heavy investments in quantum computing, including more than $10 billion to build the first large-scale quantum computer by 2029. The U.S. government backed IBM and other companies in May to shore up the quantum supply chain. However, the company's quantum efforts and expanding AI partnerships, including with OpenAI, are still in early stages and are not yet large enough to materially offset weakness in its core software and infrastructure businesses, according to Reuters and India Today.

The development underscores a growing disruption in the software industry. Businesses racing to secure supply-constrained servers, chips and networking gear for AI are diverting spending away from other technologies, adding to concerns about a sector already rocked by the rise of AI tools that can automate routine tasks. Krishna acknowledged the reality: "These conditions require our teams to execute perfectly, and this quarter we faltered. We did not adapt and move quickly enough."