IBM Warns AI Spending Shift Is Squeezing Software Budgets
IBM has admitted that it struggled to keep pace with a major change in corporate technology spending. Companies are increasingly directing their budgets toward data-center infrastructure rather than traditional software.
The technology giant warned that this shift would significantly affect its second-quarter earnings. The announcement provides one of the clearest signs yet that the artificial intelligence boom is creating pressure across the software industry.
IBM Shares Plunge Following Earnings Warning
IBM shares fell approximately 25% on Tuesday following the warning. The decline put the stock on course for an even larger one-day loss than it experienced during the 1987 Black Monday market crash.
The sell-off also spread across the wider software sector. Investors became increasingly concerned that infrastructure and cybersecurity spending could continue to take priority over software purchases.
Companies Prioritize AI Infrastructure
Businesses are racing to secure servers, processors, storage systems and networking equipment required to develop and operate artificial intelligence applications.
Many of these products remain affected by limited supply. As a result, companies are redirecting technology budgets toward essential data-center infrastructure and away from other software investments.
The trend adds further pressure to a software industry already disrupted by AI tools capable of writing computer code, automating business processes and replacing certain traditional software functions.
Corporate Spending Shift Surprised IBM
IBM CEO Arvind Krishna said the company noticed a sharp change in customer spending during the final weeks of June.
According to Krishna, clients moved parts of their quarterly capital expenditure budgets toward servers, storage and memory products. Many businesses wanted to secure equipment before possible supply shortages and price increases.
IBM had expected some disruption related to supply-chain conditions. However, the company underestimated the scale of the spending reprioritization.
Krishna also revealed that several major transactions did not close within the expected period.
Mainframe Business Faces Weakness
IBM said much of the slowdown came from its mainframe division.
Mainframes are powerful computer systems used to process enormous volumes of transactions. Banks, airlines, governments and other large organizations rely heavily on these machines for critical daily operations.
Although mainframes remain an important part of IBM’s business, demand can fluctuate depending on corporate upgrade cycles and technology spending conditions.
Cybersecurity Spending Gains Priority
Companies are also increasing their cybersecurity investments as artificial intelligence creates more advanced hacking threats.
Recent AI developments have made it easier to identify weaknesses in existing software, digital systems and encryption technologies. This has pushed businesses to strengthen their security infrastructure.
The growing focus on cybersecurity may therefore reduce the amount of money available for other software products and IT projects.
IBM Forecasts Slower Revenue Growth
IBM expects its second-quarter revenue to increase by only 1% to approximately $17.2 billion.
Analysts surveyed by LSEG had forecast revenue of around $17.86 billion. If IBM’s projection proves accurate, it would represent the company’s weakest revenue growth in more than a year.
The company also expects adjusted earnings of $2.93 per share. That is below the analyst consensus estimate of $3.02 per share.
IBM Continues Its Software Transformation
IBM sells mainframe computers, enterprise software and technology consulting services to major corporations and government organizations.
The company has been working to reduce its dependence on the cyclical mainframe market. It has increasingly focused on software, cloud computing and its high-margin Red Hat division.
Red Hat helps companies develop and operate applications across multiple cloud providers and computing environments.
However, the latest warning has raised questions about whether IBM’s software strategy can protect the company from the wider shift toward AI infrastructure spending.
Analysts Question How Long the Shift Will Last
Chris Beauchamp, chief market analyst at IG Group, described the situation as a difficult moment for IBM and the broader software industry.
The main concern is how long businesses will continue prioritizing infrastructure and cybersecurity over traditional software spending.
A temporary spending shift lasting only a few months may be manageable. However, a longer slowdown could renew concerns about growth prospects and valuations across the software sector.
Software Stocks Join the Sell-Off
If IBM’s losses continue, the company could lose roughly $70 billion from its previous market valuation of approximately $272.78 billion.
Other major software companies also came under pressure. Shares of Microsoft, ServiceNow, Salesforce and Intuit declined between 2% and 5%.
The broader decline shows that investors view IBM’s warning as a potential industry-wide problem rather than an issue affecting only one company.
IBM Highlights Quantum Computing Investment
IBM attempted to reassure investors by emphasizing its long-term investments in quantum computing.
The company plans to invest more than $10 billion in developing what it hopes will become the first large-scale quantum computer by 2029.
Interest in quantum technology has increased following support from the United States government. In May, the government backed companies including IBM as part of efforts to strengthen the domestic quantum computing supply chain.
AI and Quantum Projects Remain at an Early Stage
IBM is also expanding its artificial intelligence partnerships, including its relationship with OpenAI.
However, the company’s AI partnerships and quantum computing projects remain in their early stages. These businesses are not yet large enough to compensate for weakness in IBM’s core software and infrastructure operations.
Investors will now closely examine IBM’s upcoming financial results for more information about customer spending, software demand and the company’s AI strategy.
IBM is expected to release its second-quarter earnings on July 22.
