International Business Machines (IBM) saw its shares plunge 20% in premarket trading after the company reported a revenue forecast that fell short of Wall Street expectations, citing a late-June shift in client spending toward artificial intelligence infrastructure. The news also dragged the broader software sector lower, with the iShares Expanded Tech-Software Sector ETF (IGV) falling more than 4%.
What happened
IBM, a US technology company with a long history in hardware, software, and services, told investors that in the final weeks of June, some clients redirected their fixed quarterly IT budgets toward securing AI-related hardware—such as servers, storage, and memory—ahead of expected price increases. This left software as the easiest line item to delay, according to the company's commentary.
The shift showed up in IBM's guidance: the company forecast quarterly revenue of $17.2 billion, well below the $17.86 billion analysts tracked by LSEG had expected. The miss spooked investors, who had been watching for signs that IBM's turnaround efforts, including its push into hybrid cloud and AI, were gaining traction.
Why it matters for investors
For everyday investors, the IBM news is a reminder that the AI boom is not a one-way bet. While companies like Nvidia have seen massive gains from AI chip demand, the spending shift can hurt other parts of the technology sector—especially software firms that rely on steady corporate IT budgets.
When businesses face tight budgets and rising costs for AI hardware, they often delay software purchases, which can hit revenue for companies like IBM, Microsoft, Oracle, and Salesforce. The software ETF's 4% drop shows that the concern is not limited to IBM alone.
Investors should watch for similar commentary from other tech companies in the coming weeks, as earnings season heats up. If more firms report that AI hardware spending is crowding out software, it could signal a broader trend that may pressure software stocks in the near term.
Broader context
The shift in spending comes amid a broader race among companies to secure AI infrastructure, including graphics processing units (GPUs) and data center capacity. As demand for AI services surges, hardware suppliers have raised prices, prompting businesses to lock in supply before costs rise further.
This dynamic is not entirely new: similar patterns have played out during previous technology cycles, such as the cloud computing boom, where initial hardware investments eventually led to higher software spending. However, the speed and scale of the current AI buildout have caught some investors off guard.
IBM's forecast miss also highlights the challenges legacy tech companies face in adapting to the AI era. While IBM has invested heavily in its Watson AI platform and hybrid cloud offerings, its revenue still depends on a mix of software, consulting, and mainframe hardware—making it vulnerable to shifts in client priorities.
What to watch next
Investors will be closely watching IBM's earnings call for more details on the spending shift and whether the company expects it to be temporary or longer-lasting. They will also look for updates on IBM's AI-related revenue, which the company has touted as a growth driver.
Beyond IBM, the broader software sector will be in focus as other companies report earnings. If the trend of AI hardware crowding out software spending continues, it could lead to more forecast misses and stock declines. Conversely, if the shift proves short-lived, software stocks could rebound quickly.
For now, the IBM news serves as a cautionary tale: even in a hot market like AI, not every company benefits equally, and investors need to understand how different parts of the tech ecosystem interact.
