IBM has shown the market that the AI boom carries hidden risks. Shares of the century-old tech giant fell by more than 25 percent on Tuesday after the company informed investors that major corporate clients have redirected their spending toward hardware necessary for AI development.
Instead of software and mainframe stacks, which IBM had anticipated, clients began investing in servers, data storage, and memory. According to TechCentral, IBM's value decreased by $69 billion (approximately 1.25 trillion Rands) relative to a market capitalization of $272.8 billion (about 4.94 trillion Rands). The Guardian also reported a drop of over 25 percent, while Bloomberg recorded a daily decline of up to 27 percent.
In a letter to investors, IBM disclosed the scale of the problem. The company stated that preliminary revenue for the second quarter was $17.2 billion (about 312 billion Rands), an increase of only 1 percent. Software revenue grew by 5 percent, while infrastructure revenue declined by 7 percent.
IBM Chairman, President, and CEO Arvind Krishna noted that the company expected some pressure related to the launch of the z17 mainframe, but the shift in spending at the end of the quarter was more significant than anticipated. Krishna wrote: 'These conditions demand flawless execution from our teams, and we stumbled this quarter. We did not adapt or act quickly enough, and numerous large deals were not closed on schedule, which was the main reason for our shortfall.'
An inconvenient aspect for IBM is that this period was supposed to be a significant milestone for it in the field of AI. Instead, clients rushed to secure infrastructure with limited supply before expected price increases, and some also directed funds toward cybersecurity following recent breakthroughs in AI hacking.
IBM asserts that its high-margin software business maintains positive trends. Red Hat revenue increased by 11 percent, and its distributed infrastructure division showed growth of 37 percent. Krishna drew investors' attention to a $5 billion (about 91 billion Rands) commitment to AI cybersecurity called Lightwell, as well as a plan to invest over $10 billion (about 181 billion Rands) in quantum computing over five years.
Experts note that the market issue is timing. If AI spending is diverting corporate budgets away from traditional enterprise software right now, investors do not need to wait for some futuristic scenario where software will be completely displaced. They can observe the movement of budget items in real time.
Chief market analyst Chris Bosham of IG Group told Reuters that this is a 'difficult moment for IBM and software stocks,' questioning how long this transition toward infrastructure and cybersecurity will last. For South Africans holding foreign technology assets, this demonstrates the less brilliant side of the AI trend: infrastructure companies in the style of Nvidia experienced a golden age, while legacy software producers are now forced to prove they are selling tools, not just standing next to the problem.
IBM plans to publish its full second-quarter results on July 22.
IBM's shares sharply declined by 25% on Tuesday, marking a steeper single-day drop than the 'Black Monday' crash of 1987. This decline occurred against IBM's admission that the company failed to keep pace with the shift in corporate spending structures, which are moving from software to data center infrastructure, leading to a significant profit decrease in the second quarter. This is considered the clearest sign of the growing influence of artificial intelligence on this sector.
According to CEO Arvind Krishna, clients began redirecting their capital expenditures at the end of June towards purchasing servers, memory, and data storage systems to secure access to infrastructure facing supply shortages before expected price increases. Krishna noted that while the company anticipated some supply chain impact, it did not forecast such a scale of capital expenditure reallocation. Furthermore, it was observed that several major deals failed to close as expected.
The company's weakness was largely tied to its mainframe business, which involves selling high-performance computers and software for processing millions of daily transactions in industries such as aviation and banking. It was also noted that enterprises have begun paying more attention to cybersecurity expenses following recent breakthroughs in AI-powered hacking capabilities. Anthropic's Mythos model raised business concerns due to its ability to detect vulnerabilities in existing encryption and software systems, forcing companies to strengthen their cyber defenses.
IBM forecasts only a 1% revenue growth, reaching $17.2 billion in the second quarter, which is below analysts' estimate of $17.86 billion, according to LSEG data. This will mark the weakest revenue growth in over a year. The company also projected an adjusted earnings per share of $2.93 against a forecast of $3.02. IBM provides IT consulting services to large corporations and governments, as well as selling enterprise software and mainframes. The company is making efforts to reduce dependence on the cyclical mainframe business by focusing on its software division, including the high-margin Red Hat business, which helps firms run applications on various cloud platforms.
Chris Bosham, a lead market analyst at IG Group, described the current situation as an 'ugly moment' for IBM and software stocks, adding that the key question will be the duration of the transition to infrastructure and cybersecurity. He suggested that a few months might be tolerable, but beyond that, serious questions will arise again regarding software stocks. It should be noted that IBM lost $69 billion from its market capitalization of $272.8 billion, while Microsoft, ServiceNow, Salesforce, and Intuit fell by 2–5%. To reassure investors, IBM highlighted its major investments in quantum computing, including over $10 billion for developing the first large-scale quantum computer by 2029. This technological progress regained attention after the US government supported companies like IBM in May to strengthen supply chains. However, IBM's efforts in quantum technologies and expansion of AI partnerships, including collaboration with OpenAI, are still in early stages and not substantial enough to significantly offset the weakness of the company's core software and infrastructure business. Second-quarter results are expected on July 22.
