IBM shares crash 25% after CEO warns the company 'faltered' in adapting to AI spending shift

The numbers behind the sell-off

IBM reported preliminary second-quarter revenue of $17.2 billion, a 1% increase from the same period a year ago but well below the $17.86 billion analysts had expected, according to data compiled by LSEG. Software revenue rose 5%, compared with Wall Street's expectation of 10%, per Evercore ISI analysts. Infrastructure revenue fell 7%, a steeper decline than the expected 3% drop. The company's shares closed 25% lower, the largest one-day drop since at least 1972, wiping out $69 billion in market capitalization.

Why clients pulled back

CEO Arvind Krishna said in a letter to shareholders that clients shifted their quarterly capital expenditure toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases driven by the AI boom. The company had expected strong sales in mainframes and related software, but corporate clients instead redirected spending to computing infrastructure from elsewhere. Krishna noted that the rising costs of chips left less room for IBM's bread-and-butter mainframe and software businesses.

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.

Execution failures at IBM

Krishna acknowledged company-specific problems beyond the spending shift. "These conditions require our teams to execute perfectly, and this quarter we faltered," he wrote. "We did not adapt and move quickly enough, and numerous large deals failed to close on the timelines we expected, driving the majority of our shortfall." The company saw a shortfall in sales of its Z platform mainframes, including the AI-focused z17 launched in 2025. Krishna also said clients were "distracted" with cybersecurity needs driven by emergent AI threats.

We did not anticipate the magnitude of the capex reprioritization.

Market reaction and analyst response

The sell-off rippled across the software sector, with other software companies also trading lower. Baird managing director Ted Mortonson called it "a major miss that will rattle many" in an email to Axios. Goldman Sachs analysts flagged what they called "company-specific execution issues." The decline follows an already volatile year for IBM shares, which saw their biggest one-day drop since 2000 in February and their biggest one-day rally in the same period.

This a major miss that will rattle many.

What comes next

Krishna pointed to quantum computing as a potential future revenue source, noting IBM's plan to partner with the U.S. Department of Commerce to build a quantum wafer foundry called Anderon, matching $1 billion in federal funding. He said IBM is "on track to deliver the first large-scale fault-tolerant quantum computer by 2029." Meanwhile, companies are implementing AI usage caps and shifting toward lower-cost models to preserve budgets, according to UBS analyst Taylor McGinnis, adding pressure on conventional software spending.