IBM has sent one of the clearest signals yet that the artificial intelligence investment boom is reshaping enterprise technology spending, warning that customers are shifting budgets from traditional software to AI infrastructure. IBM AI warning spooked Wall Street, leading to a sharp sell-off that wiped about a quarter of the company’s market value in a single trading session and dragged the broader software group down.
The tech giant reported preliminary second-quarter financial results ahead of its scheduled earnings release, with revenue expected to be about $17.2 billion, well below analysts’ expectations of about $17.86 billion. Adjusted earnings are forecast to be $2.93 per share, also below Wall Street forecasts. The weak outlook led investors to re-evaluate the near-term outlook for enterprise software companies dealing with fast-changing priorities of customer spending.
Reflecting the larger IBM AI warning, IBM’s Chief Executive Officer Arvind Krishna said the company was slow to respond to a sudden change in enterprise IT budgets. Instead of investing in new software projects, many corporate customers accelerated purchases of servers, storage systems, memory, networking equipment, and other data center infrastructure needed to support AI deployments.
According to Krishna, several large transactions failed to close during the quarter as customers redirected spending toward securing AI-related hardware, driven by supply constraints and concerns over rising component costs. This shift in priorities disrupted expected deal timelines and weighed on overall performance.
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IBM also said much of the weakness was in its mainframe business, which sells high-powered systems and software that process millions of daily transactions in industries such as banking and airlines. Furthermore, increasing investment in security continued to pull budgets away from traditional software investments, adding to the pressure on the company’s results.
The IBM AI warning, and the market response to it, were quick. IBM shares tumbled about 25%, one of the steepest one-day declines in decades for the company and the worst trading day in modern history. The sell-off spread across the software industry, with investors also driving down shares of several enterprise software companies as worries grew that the spending shift could go well beyond IBM.
The IBM AI warning has sparked a debate about whether enterprise tech spending is entering a new phase. Companies have been boosting spending on generative AI for much of the past two years, but IBM’s comments suggest those investments are increasingly coming at the expense of traditional software purchases rather than new spending overall.
Early numbers from IBM also indicated issues in segments of its core business. Infrastructure revenue was weaker in the quarter, while software growth was slower than market expectations. The company said it faced execution issues, including a number of large customer deals closing later than expected, which added to the pressure on quarterly results.
The IBM AI warning could also be an early indicator for the broader enterprise software industry beyond IBM. Investors have wrestled for some time now over whether generative AI will lead to lifted overall tech spending or simply shuffle around existing budgets. IBM’s newest disclosure indicates that, at least for the near term, companies are making tough choices, favoring AI infrastructure investments over traditional software acquisitions.
Investors will look for more color on customer demand, software performance, AI-related revenue, and management’s outlook for the rest of the year when IBM reports full second-quarter earnings on July 22. Hopefully the report will give a clearer view of whether the current shift in spending is a short-term adjustment or a longer-term change in enterprise technology investment following the recent IBM AI warning.
