IBM warning sparks software selloff as AI spending squeezes budgets
The tech giant said customers are shifting spending from software to servers, chips and data centers, raising fresh concerns about AI’s impact on the software industry.
IBM triggered a selloff in software stocks on Tuesday after warning that second-quarter revenue would fall short of expectations, signaling that businesses are prioritizing spending on artificial intelligence infrastructure over software, the clearest indication yet of the pressure AI investment is placing on the broader technology sector.
Shares of IBM fell 20% in premarket trading, dragging down other software companies and weighing on Dow futures. The iShares Expanded Tech-Software Sector ETF also declined more than 4%.
For years, software investors have been concerned that AI tools capable of automating routine tasks could threaten the industry's growth model. IBM’s warning added a new dimension to those concerns: even the massive increase in AI spending on servers, chips and networking equipment is now competing directly with software budgets.
"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," IBM CEO Arvind Krishna wrote in a letter to investors.
Krishna said IBM had anticipated some supply-chain-related impact, but "did not anticipate the magnitude of the capex reprioritization." He added that the company had "faltered" in adapting quickly enough and that "numerous large deals" failed to close as expected.
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According to preliminary results, IBM expects second-quarter revenue of $17.2 billion, below analysts' expectations of $17.86 billion, according to data compiled by LSEG. Adjusted earnings per share are expected to reach $2.93, compared with the $3.02 forecast by analysts.
The warning highlights a growing divide in the technology industry. While companies building AI infrastructure, including chipmakers, cloud providers and data center operators, continue to benefit from heavy investment, software companies are increasingly being forced to prove that AI will expand rather than replace their businesses.
"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."
