IBM shares extended their sharp decline on Wednesday after suffering one of the biggest one-day selloffs in the company’s history, with analysts warning that changing corporate technology spending priorities could continue to weigh on the stock despite its long-term artificial intelligence ambitions.
The shares fell more than 2.7% on Wednesday, adding to Tuesday’s 25% plunge that wiped out between $67 billion and $70 billion in market value.
The stock has now fallen more than 27% this year after the company released preliminary second-quarter results that missed Wall Street expectations.
The technology company reported adjusted earnings of $2.93 per share on revenue of $17.2 billion, below FactSet estimates of $3.01 per share on revenue of $17.86 billion.
While software revenue rose 5% during the quarter, consulting revenue was broadly flat, increasing 1% at constant currency, and infrastructure revenue declined 7%.
AI hardware spending catches IBM off guard
Investors appeared to focus less on the headline earnings miss than on management’s explanation for the disappointing performance.
Chief executive Arvind Krishna said customers unexpectedly redirected spending toward AI-related hardware investments during the closing weeks of the quarter.
“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 wrote 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,” he said.
The comments reinforced concerns that enterprises are prioritising foundational AI infrastructure over broader software and consulting projects, leaving companies such as IBM exposed to shifting IT budgets.
The spending trend has also been cited by other technology companies as customers race to secure computing capacity amid surging demand for AI workloads.
Analysts downgrade IBM; expect stock to remain range-bound
Following the earnings disappointment, Oppenheimer downgraded IBM to Perform from Outperform and removed its $350 price target.
The brokerage noted that software revenue growth of 5% fell well short of its own 12% estimate.
According to Oppenheimer, IBM attributed much of the weakness to delays in closing large mainframe-related software deals rather than outright cancellations, with stronger-than-expected growth at Red Hat and continued momentum from HashiCorp and Confluent partially offsetting the shortfall.
Infrastructure revenue decline of 7% was also higher than Oppenheimer’s expectation for a 5% decline.
The brokerage said consulting growth of just 1% also came in below forecasts.
Oppenheimer warned that it would be “difficult for IBM to get ‘double-digit’ CC growth in software for CY26/27 without additional large acquisitions or a material catch-up in large deals.”
“The bull thesis will take longer to materialize, and we anticipate the stock will be range-bound near term,” analyst Ittai Kidron Singh wrote.
The firm added that the migration of enterprise spending toward servers and storage should benefit hardware suppliers while creating near-term risks for infrastructure software companies facing tighter IT budgets.
HSBC also turned more cautious, cutting its recommendation from Hold to Reduce while lowering its price target to $191.
Can’t recommend IBM even after the decline: Cramer
CNBC’s Jim Cramer said IBM has found itself on the wrong side of an important shift in enterprise technology spending.
“That’s the new reality, and I have no idea when it will change, which is why I can’t recommend IBM, not even after today’s severe decline,” the “Mad Money” host said on Tuesday.
Cramer argued that businesses are increasingly concentrating their technology budgets on three areas: cybersecurity, AI hardware and AI token consumption costs.
“Unfortunately for IBM, they have too many products and services that fall into the ‘other types of spending’ categories, even if they also have a decent overall AI narrative,” he said.
While praising Krishna for taking responsibility for the weak quarter and acknowledging IBM’s attractive dividend yield of more than 3%, Cramer said those positives were insufficient to offset broader concerns.
“I’m too worried about these trends to say that IBM’s now safe to buy,” he said.
“We’re at the point in the year where IT managers are putting together their budgets for 2027, and you have to assume that these three priorities I just identified will continue to dominate, which means anything outside of them has a real problem.”
“I hope that IBM truly is just seeing its deals get delayed, and not canceled,” he added. “But I can’t tell you to buy a stock because I hope something is true.”
Wall Street divided on IBM’s prospects
Citi analyst Fatima Boolani said the weak quarter had increased uncertainty around IBM’s growth outlook.
“In what we garner is now a likely wider-dispersion for 2026/2027 expectations, renewed and emboldened ‘AI-disruptee/AI-loser’ concerns, we anticipate shares to be tethered,” she said.
Goldman Sachs analyst James Schneider said the results reflected broader spending shifts across the industry rather than purely company-specific challenges.
“We believe the mainframe shortfall reflects client demand re-prioritization toward near-term server and other hardware purchases given surging memory and component prices, a dynamic consistent with what peers such as Dell and HP have cited,” Schneider said.
He added that weaker transaction processing revenue stemmed from fewer new mainframe purchases, while IBM’s Data & Automation software business also faced company-specific execution issues.
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