IBM shares plummeted 25% following a warning about weak quarterly results

Shares of tech industry veteran International Business Machines fell nearly 25% during trading on July 14, after the company released its preliminary second-quarter results. This could mark IBM’s biggest one-day plunge in nearly 40 years, according to Barron’s.

According to the company, its adjusted earnings for the reporting period will be $2.93 per share. The FactSet consensus estimate called for earnings of $3.01 per share, CNBC reports. Revenue is expected to reach $17.2 billion, though analysts had anticipated $17.9 billion, according to Bloomberg. IBM estimates that its pre-tax margin will decline by 90 basis points to 14.4%.

Arvind Krishna, the company’s CEO, stated that in the final weeks of June, customers reallocated their capital expenditures toward the purchase of servers, data storage systems, and memory in order to secure hard-to-find infrastructure before an expected price increase. This had an impact on IBM’s product costs. Krishna acknowledged that the company had not anticipated the impact to be “on such a large scale.” In addition, throughout the quarter, customers were focused on the rapidly changing cybersecurity landscape amid the advancement of AI, he said.

“These conditions require flawless execution from our teams, and we faltered this quarter. We failed to adapt and act quickly enough, and many major deals were not closed by the deadlines we had anticipated, which was the main reason for our shortfall,” the IBM CEO wrote in a letter to investors.

IBM's preliminary results had a negative impact on other software companies: Workday's stock fell by more than 8%, while ServiceNow's stock dropped by about 7.7%.

The company will release its quarterly report on July 22.

Analysts at Mizuho noted that capital expenditures on AI appear to be “crowding out other expenses.” Although Krishna also cited cybersecurity-related issues at IBM clients, “the biggest problem appears to have been internal execution,” the analysts added, according to Barron’s.

“Nevertheless, one bright spot was that the software segment remained resilient,” Mizuho wrote. The recent acquisitions of HashiCorp and Confluent, intended to strengthen the business, “have yielded good results, and IBM’s comments effectively confirm that spending on AI infrastructure remains high.”

“IBM’s results will deal a crushing blow to the stocks of companies in the software and services sector, as investors will fear that the reallocation of capital expenditures will negatively impact the entire industry,” — Bloomberg quotes Adam Chrisfulli, founder of the research and consulting firm Vital Knowledge.

Following the release of its preliminary results, HSBC downgraded its rating on IBM shares from “hold” to “sell” and revised its price target from $231 to $191. This implies a 34% decline in the company’s stock price relative to the last closing price.

Morgan Stanley, on the other hand, raised its price target from $267 to $293, while maintaining its “hold” rating. This price is about 1% higher than the closing price on July 13.

IBM’s difficulties have become apparent amid concerns about the threat posed by artificial intelligence, which is relevant to the entire software sector, Barron’s notes. In February, IBM’s stock fell after Anthropic unveiled a tool to modernize the COBOL language, claiming it could help update the outdated programming language used by the company’s mainframes.

IBM is trying to convince investors that AI will strengthen its business by boosting demand for infrastructure software that enables customers to work with AI models, the publication reports.

This article was AI-translated and verified by a human editor