IBM stock crashes 25%, its worst day since 1987, on AI spending shift

IBM (NYSE: IBM) lost about a quarter of its market value on Tuesday, July 14, after warning that corporate customers are pouring money into AI hardware and cybersecurity instead of the enterprise software and mainframes that anchor its business. 

The one-day drop erased about $70 billion and is the worst drop the company has experienced in nearly 60 years, per reports.

Google Finance data put IBM at $217.07 after a previous close of $290.23, with the stock swinging between $213.22 and $229.92 during the session.

CEO Arvind Krishna took unusual public ownership of the miss in a letter to investors, stating, “These conditions require our teams to execute perfectly, and this quarter we faltered. We did not adapt and move quickly enough.”  

He stated, “numerous large deals failed to close on the timelines we expected.” Those stalled contracts, he said, drove most of the shortfall.

Where the money went instead

Krishna’s letter came before IBM’s full second-quarter results, which the company is scheduled to report on July 22. However, what spooked the market was the reason behind the weak numbers.

Krishna had said in the closing weeks of June that clients redirected their capital budgets toward “servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases.”  

He acknowledged the company had braced for some supply-chain disruption but “did not anticipate the magnitude of the capex reprioritization.”

AI purchases now account for most corporate IT budgets, which in turn leaves less cash for everything else, and for IBM this includes their newest Z mainframes and the software that runs on them. 

Memory suppliers were the visible winners on the other side of that trade, with SK Hynix recording a jump of more than 20% on Nasdaq the same day that IBM was going in the other direction.

Why are cybersecurity costs also eating heavily into corporate budgets?

After AI costs, cybersecurity accounted for the second budget shift. Krishna stated that many organizations postponed software buys to reinforce their defenses after recent advances in AI.

Following Anthropic’s release of its Mythos AI model, which has raised alarm over how fast AI can surface software vulnerabilities and weaknesses in encryption, companies have been on their toes to plug possible vulnerabilities in their systems. 

That fear moved money toward security vendors, with shares of CrowdStrike and Palo Alto Networks rising on Tuesday even as IBM sank.

Is IBM the only company affected?

IBM was not alone in its recent fall, as it seems its guidance also dragged down Microsoft (NASDAQ: MSFT), Salesforce (NYSE: CRM), ServiceNow (NYSE: NOW) and Intuit (NASDAQ: INTU). Investors are beginning to look into AI infrastructure spending and how it is starting to crowd out traditional enterprise software demand.

IBM now expects second-quarter revenue near $17.2 billion, about 1% annual growth and short of the $17.86 billion analysts had projected initially. Adjusted earnings per share are projected at $2.93, which is below the $3.02 consensus.

Analysts at Barclays say the shift is probably temporary and noted that customers are delaying mainframe orders while they absorb higher infrastructure costs, and that IBM’s Red Hat unit kept growing.

BNP Paribas was less reassuring as they informed their clients that there is no sign that the trend has yet abated. 

Investors will get the fuller picture when IBM reports on July 22.