IBM experienced the worst day in its history on Tuesday, the 14th, after issuing an unexpected warning indicating that second-quarter results would fall short of projections. The company's shares dropped by 25%, reflecting investor apprehension about how the rapid evolution of artificial intelligence (AI) will affect the business of the century-old company.
Board of Directors' Decision
Internal sources informed The Wall Street Journal that this warning resulted from a heated debate in the board of directors. Given the unsatisfactory performance, the board members had to deliberate whether they should communicate the bad news in advance or wait for the official disclosure, scheduled for a week later, when executives could detail the figures to investors.
Following questions directed at CEO Arvind Krishna, the board decided on early disclosure of the results, seeking to strengthen the company's credibility through transparency. Krishna communicated to investors, in a letter published a few hours before the market opened on Tuesday, that the company had 'stumbled this quarter.'
Impact of the AI Revolution
IBM, historically recognized for significant contributions, such as the lunar mission, the United States Social Security system, and the development of 'Jeopardy!' winning supercomputers, now faces the effects of the AI revolution. Although the company assists clients in implementing AI-based solutions, it itself was caught off guard by the speed at which the technology began to modify corporate investments.
This situation generated speculation on Wall Street about possible scenarios, such as the fragmentation of IBM or the entry of an activist investor. The degree of guidance the company will offer the market when presenting its full results next week has not yet been determined.
Market Outlook and Analysis
Krishna, who joined IBM as a software engineer in 1990 and has served as CEO since 2020, promised to detail the landscape in a conference call scheduled for Wednesday, the 22nd. He stated: 'We are confident in the strength of our portfolio and the strategic transformation of our business.'
Don Bilson, research leader at Gordon Haskett, advised that the CEO needs a swift response because 'the last thing any 63-year-old CEO can afford is to be stigmatized as an erratic executive responsible for historic stock sales.'
Shift in Corporate Investments
In recent months, other software companies, such as Salesforce, Workday, and Snowflake, have felt the impact of the fear that AI tools from companies like Anthropic and OpenAI would decrease demand for their products. However, IBM's challenge is distinct. The warning revealed that corporate investments in AI infrastructure, covering memory and cybersecurity solutions, are diverting resources that would otherwise be applied to acquiring conventional hardware.
Daniel Morgan, portfolio manager and analyst at Synovus Trust, observed that many clients have begun treating IBM's products as deferrable expenses. Morgan commented: 'You can see some saying: 'Hey, let's postpone this for a few quarters... we don't need to upgrade to the new mainframe now.' He added that this is harming the company.'
Unlike companies such as Nvidia, Google, and Oracle, which rent computing capacity, sell chips, or offer network infrastructure for AI, IBM sells hardware and software systems physically installed at client facilities. Its main buyers include large financial institutions and retail chains.
Vulnerability Due to Client Dependence
One of the points debated by the company's leadership is IBM's possible excessive dependence on large corporate clients. People close to the discussions indicate that executives assess that this model exposes the company to irregular update cycles and the postponement of large contracts during times of economic instability.
As an alternative, expanding presence in medium-sized companies is being analyzed to diversify the customer base. However, the board recognizes that this strategy will take time to yield results. The board will also closely monitor the performance of the team led by Krishna, seen as a crucial test of his management. Some board members express concern that the company might adopt an overly cautious stance, which could harm its growth. A new board meeting is scheduled for the end of July.
Market Reaction and Future Debate
Debanjan Saha, a former IBM employee and current CEO of DataRobot, considered the negative reaction of investors exaggerated, praising Krishna's transparency in a LinkedIn post. Saha wrote: 'The punishment does not match the crime.'
For Saha, the sharp decline in stock value reflects a broader discussion about the organization's future. He argues that this sale is not just about one quarter, but rather about the market reassessing whether a 115-year-old corporation can lead the age of AI agents or merely survive it.
Strategy Under Krishna's Leadership
Arvind Krishna took over the direction of IBM in 2020, succeeding Ginni Rometty, after serving as senior vice president of the cloud software and cognitive computing division. His appointment signaled a strategic shift focused on expanding the company's presence in software and cloud computing.
Among the key moves of the management is the acquisition of Red Hat for $34 billion (equivalent to R$ 173.9 billion). Krishna participated in the integration of this company, which has become a fundamental driver of growth for IBM. In the previous year, the software division represented about $30 billion (R$ 153.4 billion) of the company's total revenue of $67.5 billion (R$ 345.3 billion).
IBM has also intensified its investments in quantum computing and hybrid cloud, spun off the IT outsourcing business of Kyndryl to simplify its structure, and acquired the cloud software company HashiCorp. Last year, Krishna had told people close to him that he expected AI to replace approximately half of the tasks in various workflows, increasing productivity and enabling professional reallocation.
Since then, IBM has laid off thousands of employees from its staff of about 260,000 and implemented retraining programs for part of the team.
Risks Amplified by Stock Drop
In recent months, IBM has also faced other notable events. In April, it signed an unprecedented agreement with the U.S. federal government and disbursed more than $17 million (R$ 86.9 million) related to its diversity practices. The following month, its shares rose after the announcement by the Trump administration of $1 billion (R$ 5.1 billion) in subsidies to strengthen quantum computing. The company announced that it would invest another $1 billion of its own resources in building a specialized quantum chip factory.
Despite this, the sharp retraction this week caused the company's market value to fall to less than $200 billion (R$ 1 trillion), significantly below competitors such as Broadcom, valued at about $1.8 trillion (R$ 9.2 trillion), and AMD, with approximately $800 billion (R$ 4 trillion).
People close to the company and its consultants recognize that this devaluation may increase the risk of activist investors emerging or intensify pressure for a possible company spin-off.
Change in IBM's Historical Stance
The choice to disclose a warning about poor results in advance marks a substantial change in IBM's historical conduct. For decades, the company built a reputation for stability and predictability, even without high growth rates. Traditionally, its CEOs did not even participate in earnings disclosure calls, delegating this function to financial executives.
Board members understand that the coming months will be turbulent and know that Wall Street is unlikely to accept two or three consecutive quarters of below-expectations performance. On Wednesday, the 15th, Gary Cohn, IBM Vice President since 2021, stated in an interview with CNBC that the modification in corporate spending patterns on technology may be temporary.
According to Cohn, many technology budgets defined months earlier were altered due to high investments in computing infrastructure for AI, but companies are beginning to evaluate the return on these investments. When asked about the decision to warn in advance, Cohn highlighted the CEO's initiative: 'Arvind took the initiative to say: 'Look, I want to be transparent with the world. I don't want to surprise you.'
