IBM stock was pacing toward its worst day ever on Tuesday after the company's preliminary second-quarter earnings missed analysts' targets.
In a letter to shareholders, CEO Arvind Krishna explained that the shortfall was largely driven by the company's infrastructure business.
IBM had anticipated revenue to decline by a low-single digit percentage for the year, starting in the second quarter. "What played out was worse than our expectations," Krishna wrote.
Shares of the tech giant sank 25% to $218.98, putting them on pace for their largest single-day drop on record, according to Dow Jones Market Data. The S&P 500 and Dow Jones Industrial Average both traded higher.
Krishna noted that customers abruptly shifted their quarterly budgets toward servers, storage, and memory products at the end of June to beat projected price increases for "supply-constrained infrastructure." Although IBM expected some movement, "we did not anticipate the magnitude of the capex repriorization," Krishna wrote.
In the face of these sudden changes, the company failed to "adapt and move quickly enough," delaying several major deals past their expected close dates, Krishna continued. "These are not excuses, but they are realities."
IBM expects to report $17.2 billion in revenue, behind analysts' calls for $17.9 billion. The figure includes a 7% drop in infrastructure revenue, a 5% increase in software revenue, and flat consulting revenue. Adjusted earnings are forecast to come in at $2.93 a share, missing calls for $3.01.
The announcement sent shares tumbling, erasing $66.5 billion in market value -- the worst single-day decline in IBM's history.
The company sought to soften the blow by highlighting bright spots like its burgeoning quantum computing division, which remains on track to deliver a fault-tolerant machine by 2029. IBM also pointed to its software business, where revenue tied to its Red Hat platform grew 11% sequentially.
"While performance in the quarter was below our expectations, we have conviction in the strength of our portfolio and the strategic transformation of our business," Krishna said. He alluded to several new initiatives aimed at getting the company back on track.
IBM's very existence is a testament to its ability to survive multiple tech cycles. In its century-long history, the company has reformed itself several times. IBM moved from punch-card systems to electronic computers in the 1940s, later expanded into personal computers before selling that business, and ultimately pivoted to IT consulting in the 1990s.
Regardless, the stock has trailed behind the broader market this year. Heading into Tuesday's session, shares had fallen 2% in 2026 against a 9.8% gain for the S&P 500.
IBM's struggles have come into focus as it grapples with concerns over artificial-intelligence disruption along with the rest of the software sector. Shares sold off in February after Anthropic unveiled a COBOL modernization tool, claiming it could help update the dated programming language that runs on IBM mainframes.
IBM has previously styled AI as a growth driver that will strengthen its business by increasing demand for infrastructure software, which allows clients to work with AI models.
Dan O'Regan, managing director of equity trading at Mizuho, noted Tuesday that AI capex appeared to be "crowding out other spend." Although Krishna also cited cybersecurity-related disruptions among IBM customers, "the biggest issue appears to have been internal execution," O'Regan said.
However, "the silver lining is that software remained solid," O'Regan added. The company's recent acquisitions of HashiCorp and Confluent to bolster the business "performed well, and IBM's commentary actually reinforces that AI infrastructure spending remains robust."
In his view, the results likely have a more negative implication for consulting and IT services than for the broader AI trade.
Indeed, IBM was dragging down other IT services stocks on Tuesday. Accenture, Cognizant Technology Solutions, and U.S.-listed shares of Infosys each lost around 3%.
Software stocks weren't spared from the downturn. Workday and ServiceNow were among the biggest losers in the S&P 500, falling 5.1% and 4.2%, respectively.
Although the earnings warning may seem to validate bearish investors, Barclays -- which rates the stock at Overweight with a $350 price target -- insists the announcement "is not a thesis changer."
In the firm's view, "all of these lower numbers are related to a shift in short-term investments away from the mainframe to other areas."
Analysts see a key debate emerging over whether the mainframe faces structural headwinds from AI or if it is simply a matter of timing "as there are currently other priorities due to high component price increases for distributed system." For now, Barclays wrote, "we are in the latter camp."
Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
July 14, 2026 10:45 ET (14:45 GMT)
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