IBM shares plunge 25% as AI spending boom hammers business: Ugly moment for software stocks

IBM said it had “faltered” in keeping pace with a shift in corporate spending from software to data-center infrastructure and forecast second-quarter earnings below estimates, the clearest sign yet of AI’s growing toll on the sector.The warning sent IBM’s shares down 25% in trading on Tuesday, putting the stock on track for an even steeper single-day decline than it suffered during the 1987 “Black Monday” crash.Other software stocks also tumbled, dragging the Dow lower, while the iShares Expanded Tech-Software Sector ETF fell more than 4%.Software investors have long been on edge due to fears that AI tools capable of automating routine work could pose an existential threat to the industry.Tuesday’s announcement showed that even the boom in spending on servers, chips and networking gear for AI was eating into 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,” CEO Arvind Krishna said 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,” Krishna said, adding that “numerous large deals” had failed to close as expected.IBM said the weakness was largely in its mainframe business, which sells high-powered computers and software that process millions of daily transactions for industries such as banking and airlines.It also noted that businesses were prioritizing cybersecurity spending given recent breakthroughs in AI hacking abilities.Anthropic’s advanced Mythos model has jolted businesses this year with its ability to expose flaws in existing software and encryption systems, pushing companies to ramp up cybersecurity.IBM said it expects revenue to rise just 1% to $17.2 billion in the second quarter, compared with analysts’ estimate of $17.86 billion, accord...