IBM's stock plummeted more than 25% in a single day after the company reported disappointing earnings. Analysts suggest that as investments in artificial intelligence (AI) expand, corporate budgets are shifting from software to hardware, including servers and memory.
On July 14, IBM's stock fell 25.2% on the New York Stock Exchange, marking the largest single-day drop in its history. This decline surpassed the 23.7% drop recorded on October 19, 1987, known as 'Black Monday.'
The sharp decline followed IBM's preliminary second-quarter results, which significantly missed market expectations. The company's revenue for the second quarter was $17.2 billion, a 1% increase from the previous year, but below the FactSet estimate of $17.86 billion. Adjusted earnings per share (EPS) also fell short at $2.93, compared to the expected $3.01.
IBM CEO Arvind Krishna explained that corporate clients prioritized their capital expenditures on purchasing servers, storage, and memory semiconductors, which impacted the company's performance.
With surging demand for AI leading to a shortage of memory semiconductors and potential price increases, customers focused their budgets on securing necessary hardware. Consequently, funding for related software decreased, affecting IBM, which relies heavily on software sales.
Krishna noted, "In the last few weeks of June, customers redirected their quarterly capital expenditures toward purchasing servers, storage, and memory to secure limited infrastructure and prepare for anticipated price increases. While we expected some impact from supply chain issues, we did not anticipate the scale of the shift in capital expenditure priorities."
The performance of IBM's recently launched z17 mainframe and related software products also fell short of the company's expectations. IBM initially projected a low single-digit decline in infrastructure revenue, but the actual results were worse.
Impact on the Software Sector
IBM's earnings warning has dampened investor sentiment across the software sector. Shares of ServiceNow dropped 5.8%, while Workday fell 3.5%, SAP declined 3.2%, and Salesforce decreased by 2.1%.
In contrast, shares related to memory and semiconductors rose. SanDisk increased by 5%, Micron by 4.9%, Intel by 4.7%, and NVIDIA by 4.1%. AMD and Marvell Technology rose by 2.6% and 2.3%, respectively, while storage companies Seagate Technology and Western Digital saw increases of 2.1% and 1.4%.
MarketWatch, a U.S. financial news outlet, assessed that the shift toward hardware purchases is not only raising concerns about software companies' business models but is also encroaching on budgets that would typically be allocated to software.
Luke Yang, an analyst at Morningstar, stated, "As more funds flow to hardware companies, there is little left for other sectors." He noted that hardware is taking a share of the budget that would otherwise go to other technology fields.
James Friedman, an analyst at Susquehanna, added that the technology budgets of Fortune 500 and 1000 companies are limited, and increased spending on hardware is pushing out consumption in other tech areas.
The priority for hardware purchases stems from supply shortages and rising price expectations. Friedman explained that companies are rushing to secure infrastructure and hardware, believing that buying today is cheaper than waiting until tomorrow.
This trend is reflected in stock performance this year. The Philadelphia Semiconductor Index, which tracks semiconductor companies, has surged 78.8% in 2026, while the iShares Expanded Tech-Software Sector ETF, which tracks software companies, has dropped 11.4%.
* This article has been translated by AI.
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