IBM warns AI spending shift is hitting core business

IBM has warned that a surge in spending on artificial intelligence infrastructure is weighing on its core business, in one of the clearest signs yet of how the AI boom is reshaping the technology sector.

The company said it had "faltered" in adapting to a rapid shift in corporate spending away from software and towards data centre infrastructure, resulting in a significant blow to its second-quarter earnings expectations.

Investors reacted sharply to the warning, sending IBM shares down 25% on Tuesday. The decline put the stock on course for a steeper one-day fall than the drop it suffered during the 1987 Black Monday market crash.

IBM Chief Executive Arvind Krishna said customers had increasingly redirected budgets towards securing scarce AI-related infrastructure.

"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," 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," he added, noting that "numerous large deals" failed to close as expected.

The weakness was concentrated in IBM's mainframe business, which provides large-scale computing systems used by industries including banking and aviation.

The company also said customers were increasing spending on cybersecurity amid growing concerns about AI-driven cyber threats.

IBM forecast second-quarter revenue of $17.2 billion, representing growth of just 1% and falling short of analysts' expectations of $17.86 billion.

The company also projected adjusted earnings per share of $2.93, below forecasts of $3.02.

The warning has intensified concerns about the broader software sector, which is already facing disruption from AI tools capable of writing code and automating tasks traditionally performed by software developers.

"This is an ugly moment for IBM and software stocks," said IG Group market analyst Chris Beauchamp.

"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."

In an effort to reassure investors, IBM highlighted its investments in quantum computing, including plans to spend more than $10 billion building the world's first large-scale quantum computer by 2029.

The company is also expanding its artificial intelligence partnerships, including collaborations with OpenAI.

However, analysts noted that IBM's quantum computing and AI initiatives remain at a relatively early stage and are not yet large enough to offset weakness in its core software and infrastructure businesses.

IBM is scheduled to report its second-quarter financial results on 22 July.