IBM loses nearly $70 billion in a day after CEO admits company ‘faltered’ on AI

IBM was set to lose billion from its 2.78 billion market valuation, ​if losses hold. ⁠Stocks of other software ​companies also fell as the news spooked investors. (AP Photo)

The company’s shares tanked 25 per cent soon after the warning and logged their worst single-day decline, tearing beyond the previous worst day of October 19, 1987, when shares fell 23.7%.

IBM ended up losing about $70 billion from its $272.78 billion market value. ⁠Stocks of other software ​companies also fell as the news spooked investors. Microsoft, ServiceNow, Salesforce and Intuit all fell between 2% and 5%.

“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 ⁠Krishna said in a letter to investors.

“While we anticipated some supply-chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritisation,” Krishna said.

Why AI spending hurt IBM?

The IBM CEO’s warning crystallised what many had suspected: resources are finite and companies are choosing to spend money on supply-constrained servers, chips and networking gear in an AI-crazed environment.

This meant resources routed away from other technologies. IBM was not quick enough to adapt to the shift in customer spending.

The company is expected to report weaker performance in its mainframe business, which provides high-powered computers and software that process transactions for banks, airlines and other large enterprises.

Krishna also said businesses were prioritising cybersecurity spending as AI made cyberattacks more sophisticated. One example is Anthropic’s advanced Mythos model, which has demonstrated the ability to uncover vulnerabilities in existing software and encryption systems.

Why it’s an ‘ugly moment for IBM’

Analysts called it an “ugly moment for IBM”.

The company expects revenue to grow by just 1% to $17.2 billion in the second quarter, its weakest growth in over a year. This will be roughly $660 million short of what Wall Street analysts had pencilled in.

“This is an ugly moment for IBM and software stocks… the big question will be how long the shift to infrastructure and cybersecurity ‌lasts,” Reuters quoted Chris Beauchamp, chief ​market analyst at IG ​Group, as saying.

“A few ​more months might be bearable, but more than that and serious questions will be asked all over again about software stocks.”

Can IBM recover from the AI shift?

IBM has been working to reduce its reliance on its cyclical mainframe business.

IBM has increasingly focused on its high-margin Red Hat business, which allows companies to run applications across multiple cloud providers.

On Tuesday, IBM sought to reassure investors by highlighting its investments in quantum computing. This includes more than $10 billion it has vowed to pour into building the first large-scale quantum computer by 2029, amid a broader government push to reduce dependence on China in critical technology supply chains.

However, IBM’s investments in quantum computing and AI partnerships—including with OpenAI—remain at an early stage. Importantly, they are not yet large enough to materially offset weakness in its ​core software and infrastructure businesses.

What to watch out for?
The company is expected to report second-quarter results on July 22.

IBM is expected to report quarterly revenue of about $17.2 billion, below analysts’ estimate of $17.86 billion, according to LSEG data cited by Reuters.

(With inputs from agencies)