A $69 billion wipeout and worst fall in nearly 40 years – IBM’s share price on Tuesday crashed 26% in trade in a sign of how the technology sector is rebalancing with the growth of artificial intelligence. Shares of IBM plunged 25% on Tuesday, with the company seeing a steeper one-day decline than it experienced during the 1987 “Black Monday” market crash. The weakness also spread to other software stocks.IBM lost about $69 billion from its market capitalisation of $272.78 billion. Shares of Microsoft, ServiceNow, Salesforce, and Intuit also declined between 2% and 5%.IBM’s business spans mainframe computers, enterprise software and information technology consulting services for large corporations and government clients.
Why did IBM share price crash so badly?
IBM said it had “faltered” in responding to a sharp shift in corporate technology spending away from software and towards data-centre infrastructure, warning that the change would significantly affect its second-quarter earnings. The announcement is the clearest indication so far of the growing impact artificial intelligence is having on the software sector.The warning underscores how companies are redirecting technology budgets towards supply-constrained infrastructure such as servers, chips and networking equipment, reducing expenditure on other technology products. It also adds to concerns surrounding the software industry, which is already facing disruption from AI tools capable of writing computer code and automating routine tasks.“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,” CEO Arvind Krishna said in a letter to investors according to a Reuters report.“While we anticipated some supply-chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization,” Krishna said, adding that “numerous large deals” had failed to close as expected.IBM said the weakness was concentrated in its mainframe business, which provides high-performance computers and software used to process millions of transactions each day across industries including banking and aviation.The company also said businesses are increasingly prioritising spending on cybersecurity following recent advances in AI-powered hacking capabilities.Anthropic’s advanced Mythos model has unsettled businesses this year because of its ability to identify vulnerabilities in existing software and encryption systems, prompting companies to step up investment in cybersecurity.
IBM expects slower growth
IBM said it expects second-quarter revenue to increase by only 1% to $17.2 billion, falling short of analysts’ forecast of $17.86 billion, according to LSEG data. If realised, it would represent the company’s slowest revenue growth in more than a year.The company also projected adjusted earnings per share of $2.93, below the analysts’ estimate of $3.02.In recent years, the company has been working to lessen its dependence on the cyclical mainframe segment by expanding its software business, particularly the higher-margin Red Hat unit, which enables enterprises to run applications across multiple cloud platforms.“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, according to Reuters.“A few more months might be bearable, but more than that and serious questions will be asked all over again about software stocks.”Seeking to reassure investors, IBM highlighted on Tuesday its substantial commitment to quantum computing, including plans to invest more than $10 billion to develop the first large-scale quantum computer by 2029.Quantum computing has attracted renewed attention after the US government, in May, backed companies including IBM to strengthen the industry’s supply chain.However, IBM’s quantum computing initiatives and its expanding artificial intelligence partnerships, including its collaboration with OpenAI, remain at an early stage and are not yet large enough to meaningfully offset the weakness in the company’s core software and infrastructure businesses.IBM is scheduled to announce its second-quarter financial results on July 22.
