IBM shares collapsed as the company disclosed preliminary second-quarter financial results that fell short of Wall Street expectations, sending the stock down roughly 23 percent in pre-market trading on Tuesday. The massive selloff marked the worst day in IBM’s history since October 1987, when the stock fell 23.7 percent during the market’s Black Monday crash.
The company reported preliminary second-quarter revenue of $17.2 billion, up just 1 percent from a year earlier but falling short of the $17.86 billion that analysts had expected. Adjusted earnings per share came in at $2.93, below the consensus estimate of $3.01. The rare pre-announcement of preliminary results, released eight days ahead of the scheduled July 22 earnings call, caught investors and analysts off guard and triggered a broad sell-off in the technology sector.
CEO Arvind Krishna took direct responsibility for the miss in a letter to investors, saying the company “faltered” in the quarter and failed to adapt quickly enough to shifting customer priorities. The core problem, he explained, was an unexpected shift in how enterprise customers allocated their technology budgets in the final weeks of June. Rather than purchasing IBM’s software and consulting services as anticipated, customers suddenly redirected spending toward servers, storage, and memory equipment in an effort to secure scarce infrastructure before anticipated price increases.
This repriorization toward AI infrastructure proved far more dramatic than IBM had anticipated. “While we anticipated some supply chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization,” Krishna said. The shift directly hurt IBM’s infrastructure business, which saw revenue decline 7 percent, driven by weaker-than-expected sales of the company’s flagship Z mainframe systems and their associated transaction processing software.
The impact cascaded through IBM’s broader business. Infrastructure revenue fell 7 percent, while software revenue managed to grow 5 percent and consulting revenue remained flat. The Z mainframe business, which Krishna had highlighted as having the strongest start in company history earlier in the year, underperformed significantly. Large enterprise deals that IBM had expected to close during the quarter were delayed rather than canceled, pushing revenue recognition into future periods.
The shortfall extends a difficult period for IBM’s stock. After hitting an all-time high near $332 in early June, the stock had already retreated to around $249 by mid-June, down more than 22 percent from its peak, before Tuesday’s additional collapse. Despite the strong opening to the z17 mainframe program early in the year, the quantum of customer behavior shift in late June surprised management.
Beyond IBM’s own troubles, the miss sent shockwaves across the software and technology sectors. Microsoft shares fell 3 percent, while ServiceNow dropped 8 percent. Salesforce and Intuit also declined significantly. The iShares Expanded Tech-Software Sector ETF fell more than 4 percent. The selloff appeared driven by fear that the artificial intelligence buildout, while generating massive spending on infrastructure and chips, was simultaneously crowding out spending on software, consulting, and IT services.
Adding to the negative sentiment, HSBC downgraded IBM stock on Monday to Reduce from Hold and cut its price target to $191 from $231, arguing that investors could get better value by building a portfolio of IBM’s competitors. HSBC analyst Abhishek Shukla cited stretched valuation, noting that IBM trades at 22.0 times its 2027 estimated non-GAAP price-to-earnings ratio compared to a sector median of 16.9 times. The firm’s new price target implies roughly 34 percent downside from where the stock traded before the earnings warning.
The cybersecurity environment also played a role in delaying customer decisions. Krishna cited rapidly evolving cybersecurity concerns as a distraction that disrupted customer buying patterns and contributed to the delay of several large deals.
From a positive standpoint, IBM’s red hat open-source software business grew 11 percent, and the company’s distributed infrastructure business rose 37 percent, the best performance in recorded history. Year-to-date free cash flow reached $4.8 billion. Management indicated that the delayed large deals should eventually close and characterized them as deferred rather than lost.
IBM will release its complete second-quarter results and provide updated full-year guidance on July 22. Analysts and investors are watching closely to see whether management’s characterization of the quarter as an execution stumble proves accurate or whether the shift in customer spending toward infrastructure equipment reflects a more persistent reallocation of enterprise technology budgets away from software and services.