IBM has delivered one of the clearest warnings yet that the artificial intelligence investment boom is reshaping corporate technology spending, saying customers are diverting billions of dollars from software projects to secure scarce AI infrastructure.
The warning sent its shares tumbling and rattled the broader software sector.
The technology giant said it had “faltered” in keeping pace with the rapid shift in enterprise spending toward AI infrastructure, forecasting weaker-than-expected second-quarter revenue and earnings after large customers redirected capital expenditure to servers, storage systems, networking equipment and memory chips.
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The warning wiped about 25% off IBM’s share price on Tuesday, putting the stock on track for its worst single-day decline since the 1987 Black Monday market crash. At those levels, the company was poised to lose roughly $70 billion in market value from its capitalization of $272.8 billion, while the sell-off spread across the enterprise software sector.
Shares of Microsoft, ServiceNow, Salesforce and Intuit all fell between 2% and 5% as investors reassessed whether the AI investment cycle is cannibalizing spending on traditional enterprise software.
IBM Chief Executive Arvind Krishna said the spending shift accelerated unexpectedly during the final weeks of June as customers rushed to secure hardware before anticipated price increases and ongoing supply shortages.
“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,” 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 reprioritization.”
Krishna added that numerous large customer contracts expected to close before the end of the quarter were delayed as companies redirected budgets toward AI infrastructure purchases.
The comments suggest enterprises are making difficult trade-offs rather than simply increasing overall technology spending. Instead of expanding IT budgets across all categories, many organizations are postponing software upgrades and consulting projects to ensure they secure access to scarce AI computing resources.
IBM’s warning provides another indication that the AI boom has entered a new stage. During the early phase of generative AI, software companies benefited from enthusiasm surrounding AI-powered applications and productivity tools. Now, however, investment appears increasingly concentrated on the physical infrastructure required to train and deploy AI models.
Cloud providers, governments, and enterprises are investing hundreds of billions of dollars in graphics processors, high-bandwidth memory, advanced networking equipment, storage systems, and data centers. With supply still constrained, companies are prioritizing securing hardware even if it means delaying spending elsewhere.
Recent earnings from companies across the semiconductor supply chain have reinforced that trend. TSMC, ASML, Samsung Electronics and SK Hynix have all reported exceptionally strong demand driven by AI infrastructure expansion, while hardware suppliers continue to announce capacity increases to meet customer orders extending well into the coming years.
IBM’s results suggest those gains are increasingly coming at the expense of parts of the enterprise software market.
Mainframe Business Bears The Brunt
IBM said the weakness was concentrated in its mainframe division, which supplies high-performance computing systems used by banks, airlines, insurers and governments to process millions of daily transactions. The company has spent years attempting to reduce its dependence on the cyclical mainframe business by expanding higher-margin software offerings, particularly through Red Hat following its $34 billion acquisition in 2019.
However, even those efforts were insufficient to offset customers’ sudden reallocation of spending toward AI infrastructure.
The warning indicates that even large enterprises with mission-critical IT systems are delaying software purchases while prioritizing investments viewed as essential for competing in the AI era.
While software spending generally weakened, IBM said cybersecurity remained a priority as businesses respond to increasingly sophisticated AI-powered cyber threats. The company pointed to growing concerns following advances in AI systems capable of identifying software vulnerabilities and exposing weaknesses in existing security infrastructure.
Organizations are therefore continuing to allocate capital toward cybersecurity even while delaying other software investments, making security one of the few segments of enterprise technology that continues to attract strong spending alongside AI infrastructure.
IBM forecast second-quarter revenue of approximately $17.2 billion, representing annual growth of just 1% and falling short of analysts’ consensus estimate of $17.86 billion, according to LSEG.
If realized, the performance would mark the company’s weakest revenue growth in more than a year.
The company also projected adjusted earnings of $2.93 per share, below Wall Street’s expectation of $3.02 per share.
The disappointing outlook amplified investor concerns that IBM’s business transformation remains vulnerable to shifts in enterprise technology spending.
Analysts said IBM’s warning could signal broader challenges across enterprise software.
“This is an ugly moment for IBM and software stocks,” said Chris Beauchamp, chief market analyst at IG Group.
“The big question will be how long the shift to infrastructure and cybersecurity lasts. A few more months might be bearable, but more than that and serious questions will be asked all over again about software stocks.”
The concern extends beyond cyclical spending patterns. Software companies are simultaneously confronting two structural pressures: customers are reallocating budgets toward AI infrastructure, while AI itself is beginning to automate software development, coding, and other enterprise workflows.
That combination has raised questions about how quickly software vendors can generate returns from their own AI investments.
Betting on Quantum Computing
Seeking to reassure investors, IBM highlighted its longer-term strategy centered on quantum computing, where it has committed more than $10 billion toward building the first large-scale commercial quantum computer by 2029.
Interest in quantum computing has increased following U.S. government efforts announced in May to strengthen domestic quantum technology supply chains, with IBM among the companies expected to play a leading role.
IBM also continues expanding partnerships in artificial intelligence, including collaborations with OpenAI, as it seeks to position itself in the next generation of enterprise computing.
However, those initiatives remain in their early stages and are not yet generating enough revenue to offset weakness in IBM’s traditional businesses.
IBM’s announcement weighs heavily because it offers one of the first concrete examples of how the AI infrastructure race is reshaping enterprise technology spending. Rather than lifting all segments of the industry equally, the boom is creating clear winners and losers.
Semiconductor manufacturers, equipment makers, memory suppliers and data center operators continue to benefit from record demand as organizations race to build AI capabilities. Meanwhile, parts of the software industry now face the prospect that customers will defer upgrades and new deployments until the current infrastructure buildout stabilizes.