International Business Machines Corp. (IBM) experienced a historic 25% single-day selloff on Tuesday, erasing roughly $70 billion in market capitalization, as the company's preliminary second-quarter results fell short of Wall Street expectations and management cited an unexpected shift in corporate technology spending toward artificial intelligence hardware.
The stock continued to slide on Wednesday, falling another 2.7%, bringing its year-to-date decline to over 27%. The technology giant reported adjusted earnings of $2.93 per share on revenue of $17.2 billion, missing FactSet consensus estimates of $3.01 per share and $17.86 billion, respectively.
AI Hardware Spending Surprise
Investors focused on CEO Arvind Krishna's explanation that customers redirected capital expenditures toward servers, storage, and memory purchases in the final weeks of the quarter to secure supply-constrained infrastructure ahead of expected price increases. "While we anticipated some supply chain-related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization," Krishna wrote in a letter to shareholders.
The commentary reinforced concerns that enterprises are prioritizing foundational AI infrastructure over broader software and consulting projects, leaving IBM exposed to shifting IT budgets. This trend has also been cited by other technology companies as customers race to secure computing capacity amid surging demand for AI workloads. For context, AMD Drops 6% Amid Chip Selloff, Yet Analysts Raise Targets on AI Demand highlights similar dynamics in the semiconductor space.
Analyst Downgrades and Price Target Cuts
Following the earnings disappointment, Oppenheimer downgraded IBM from Outperform to Perform and removed its $350 price target. The brokerage noted that software revenue growth of 5% fell well short of its own 12% estimate. Infrastructure revenue declined 7%, worse than the anticipated 5% drop, while consulting growth of just 1% also came in below forecasts.
Oppenheimer analyst Ittai Kidron Singh 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 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 and lowering its price target to $191.
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 offered a more tempered view, suggesting 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.
Meanwhile, 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. Cramer argued that businesses are increasingly concentrating technology budgets on cybersecurity, AI hardware, and AI token consumption costs, leaving IBM's products and services in the "other types of spending" category.
While praising Krishna for taking responsibility and acknowledging IBM's attractive dividend yield of more than 3%, Cramer said those positives were insufficient to offset broader concerns. "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."
For investors tracking broader market trends, Microsoft Stock Gains 2% as Evercore Lifts Target, Analysts Eye AI Capex illustrates how AI capital expenditure is reshaping the technology landscape.
Outlook and Key Risks
Oppenheimer cautioned that the bull thesis for IBM will take longer to materialize and that the stock is likely to remain range-bound in the near term. The brokerage noted that software revenue growth of 5% was well below its own estimate, and that IBM attributed much of the weakness to delays in closing large mainframe-related software deals rather than outright cancellations. Stronger-than-expected growth at Red Hat and continued momentum from HashiCorp and Confluent partially offset the shortfall.
As enterprise spending priorities continue to evolve, IBM faces an uphill battle to regain investor confidence. The company's ability to navigate this shift and demonstrate sustained growth in its software and consulting segments will be critical for a recovery. For now, analysts remain cautious, with the stock trading at levels not seen in years.
This article is for informational purposes only and does not constitute financial advice.
