IBM Sinks 25% as AI Hardware Buying Hits Mainframes

IBM shares plunged 25% Tuesday after the company released disappointing preliminary second-quarter results and said customers had redirected spending toward AI-related hardware ahead of expected price increases.

Revenue for the three months ending in June rose just 1% to $17.2 billion. In a letter to investors, CEO Arvind Krishna said, “We did not adapt and move quickly enough.”

IBM said a global buildout of artificial intelligence infrastructure has pushed demand for servers, memory chips, and storage sharply higher, lifting prices and creating supply shortages across the industry. Near the end of June, many large corporate customers accelerated hardware purchases to get ahead of those increases.

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That buying spree came at IBM’s expense in a key area: its higher-margin mainframe computers and related software. IBM’s infrastructure business, which includes its flagship mainframe line, posted a 7% revenue decline. Software revenue grew 5%, but still missed expectations.

The company also said cybersecurity concerns pulled clients away from previously planned projects during the quarter. IBM linked that shift to the release of Anthropic’s Mythos AI model, which has raised alarms over its ability to find weaknesses in computer networks that hackers can exploit. Cybersecurity stocks jumped on the news, with CrowdStrike up 12% and Okta and Netskope each rising about 11%.

The warning is likely to intensify scrutiny of how the AI boom is affecting traditional software as a service companies such as Salesforce, Adobe, and Intuit, whose shares were also trading lower Tuesday. Earlier this year, Wall Street briefly dubbed that fear the “SaaS-pocalypse” after analysts argued AI models could replicate many everyday software functions.

There were still a few bright spots. IBM’s Red Hat unit reported 11% revenue growth, while its server and storage business outside mainframes surged 37% as customers bought more of that equipment. IBM also announced Lightwell, a $5 billion initiative aimed at fixing vulnerabilities in open-source software, backed by Bank of America, JPMorgan Chase, and Goldman Sachs.