IBM's performance collapsed by more than 20% before the market opened! AI computing power hardware drains corporate budgets, the "end of software stocks theory" resurfaces

The American veteran technology giant IBM (IBM.US), with the two cutting-edge technologies of artificial intelligence and quantum computing shining on its head, announced on Tuesday before the US stock market opened that its preliminary quarterly sales performance fell short of Wall Street analysts' expectations. The company's CEO Arvind Krishna stated that customers are significantly tightening their spending, attributing the underperformance to customers shifting their spending massively towards chips and servers. Following the announcement of the lower-than-expected preliminary performance, the market value of the nearly $300 billion tech giant plunged by over 20% before the US stock market opened, dragging down the tech sector of the US stock market, especially tech stocks focusing on traditional SaaS software platforms, AI application software, and AI cloud computing infrastructure themes. In a preliminary performance statement on Tuesday, IBM stated that it expects its second-quarter revenue to be around $17.2 billion, compared to the Wall Street analysts' average expectation of around $18 billion. The statement revealed that the sales of IBM's infrastructure business unit were particularly hard-hit, unexpectedly dropping by about 7%. The company stated that it is still reviewing its accounts, and the final performance may vary slightly. Krishna stated that in response to industry-wide supply shortages, customers are generally redirecting their capital expenditures towards AI servers, enterprise-level NAND storage chip equipment for data centers, and high-performance DRAM memory components, weakening their spending and budgets on the company's software products. "These circumstances require our team to execute flawlessly, and this quarter we made errors," Krishna stated. "Our adjustments and actions were not swift enough, and several large transactions did not close within the expected timeframe, causing most of the performance gap." IBM's underperformance highlights that AI computing hardware is temporarily diverting enterprise information technology budgets, reigniting the "software stock doomsday" theory. This also dragged down stocks of ServiceNow, Oracle Corporation, Adobe, and other software companies, proving that enterprise budgets are indeed shifting from the "application layer" to the "computing power base." However, IBM's mistakes also include poor sales execution and the failure of large deals to close on time, not solely attributed to AI replacement; a more likely scenario is that software with low barriers, seat-based pricing, and easily replicable by intelligent agents may face pressure, while software companies with core data, workflow, compliance, security, and infrastructure management capabilities have stronger pricing power. IBM may experience its largest single-day decline in decades, putting pressure on Workday and ServiceNow as well. Before the New York Stock Exchange opened, the company's stock price fell significantly by over 21% in pre-market trading. If this decline is sustained, the stock will record its largest single-day intraday drop since the 1980s. This performance also dragged down other popular tech companies; Workday's stock price fell over 8% before opening, and ServiceNow's stock price dropped by approximately 7.7%. To some investors, IBM's pessimistic outlook points to ongoing fundamental uncertainty facing the traditional software industry market under the "AI disrupts everything" superstorm led by Anthropic. The "AI disrupts everything" narrative has been sweeping global financial markets since February, bolstered by Anthropic's introduction of a series of AI tools/agent-based AI collaborative platforms that caused widespread sell-offs in the SaaS subscription software sector and the broader software stock sector. The "Anthropic storm," which instilled panic in global software stock investors, began earlier this year when Anthropic released a powerful legal plugin for its rapidly globalized agent-based AI tool, Claude Cowork. This tool, which allows for extremely low-tech automation of contract reviews, caused market value evaporation worth billions of dollars for companies like Thomson Reuters Corporation and LexisNexis' parent company RELX. The market's pessimistic expectations of "AI disrupts everything" subsequently shook various industry sectors, leading to widespread declines in software, SaaS, private equity, insurance, wealth management, real estate, property management, and even logistics sectors. Over the next two to three weeks, traditional industries were hit one after another as investors accelerated their selling of potential "losers." IBM's hardware sales blow may hinder its efforts to reshape itself as a high-growth software company through massive acquisitions of Red Hat, HashiCorp, and Confluent. Even with the company's new strategic focus, investors remain concerned as AI tools threaten to replace many existing software products. In February this year, the AI startup Anthropic PBC released a tool that could help modernize an outdated programming language on IBM mainframes, leading to a significant sell-off of IBM stocks. IBM's CEO Arvind Krishna stated that the company had previously anticipated supply chain issues affecting performance. The storage chip shortage caused by the AI hype has had a ripple effect on global manufacturing. However, the company did not anticipate that customers would ultimately redirect their spending on IBM products to servers, storage devices, and memory purchases to hedge against further price increases. "The reality is worse than we anticipated, we miscalculated," Krishna wrote in a letter to investors, adding that the majority of the performance gap was due to the company's Z series mainframes and their popular software. "These circumstances require our team to execute flawlessly, but this quarter, we made mistakes. Our adjustments and actions were not quick enough, and several large transactions did not close on time as we expected." The company reported in its preliminary statement that diluted earnings per share may decrease by approximately 2%, to $2.27. Like most software suppliers, IBM has fully integrated cutting-edge AI technology into its products and has emphasized its capabilities in offering customers the latest technology. The company has been trying to convince investors that AI will strengthen its business rather than replace it. Senior executives at IBM have repeatedly stated that AI-related work will increase the demand for the company's underlying AI application-related infrastructure software, which enables customers to utilize leading AI models. The capital expenditure migration for AI has begun, with AI computing hardware taking the lead, and software facing valuation challenges. The global tech stocks are facing a "profit must be perfect" stress test. The core significance of IBM's warning this time is that its narrative of AI and quantum computing technologies has not fully translated into tangible income and order execution capabilities to withstand quarterly fluctuations. The preliminary sales revenue for the second quarter is only $17.2 billion, lower than the market's expected growth of around $18 billion, while IBM's first-quarter revenue increased by 9% to $15.92 billion, with software sales up by 11.3%. This contrast suggests that the high-growth software company valuation previously assigned to IBM leaves little room for error. Of particular concern is that management has acknowledged customers prioritizing budgets towards servers, storage, and memory as well as IBM's failure to adjust sales strategies promptly and delay multiple large deals. This indicates that the performance gap is due to both external budget migrations and internal execution errors, with causes not easily attributable to the macro environment. For IBM, quantum computing remains a strategic option with high value but a longer-term payback period, unable to replace responsibilities for growth on the profit sheet from Red Hat, automation, data infrastructure, consulting, and mainframe software. IBM has announced an investment of over $10 billion over the next five years to advance quantum computing efforts, aiming to build a large-scale fault-tolerant quantum computer by 2029. However, what the capital market currently needs to verify is not the technology roadmap itself, but whether the company can leverage hybrid cloud, AI governance, data orchestration, and critical mission-based infrastructure to convert enterprise AI investments into sustainable software subscriptions, consulting sales, and free cash flow. AI is a double-edged sword for IBM: it can increase demand for infrastructure software, security, and model management, but it also compresses human labor for traditional code maintenance, consulting, and system modernization. Tools like those introduced by Anthropic have prompted investors to reassess the economic moat of IBM's mainframe ecosystem. IBM's underperformance may lead to further reallocation of budgets and valuations within the tech sector: customers hoarding servers, memory, and storage validate demand for semiconductors, server manufacturers, and data center supply chains, temporarily squeezing traditional software, consulting, and postponed digital projects. Thus, IBM serves more as a warning for the enterprise software and information technology services sectors than evidence of the collapse of the entire AI industry demand; the real danger signal would be synchronous cuts in capital expenditures by cloud companies like Microsoft Corporation, Amazon.com, Inc., Alphabet Inc. Class C, or weakening orders for servers, HBM, and network equipment, which have not yet appeared. The market expects earnings growth of over 23% for the S&P 500 in the second quarter, with tech sector earnings growing over 65%. Therefore, the biggest risk currently lies not in a lack of growth but in the need for growth to surpass already high expectations. IBM's stumble could serve as a catalyst for a temporary pullback in overvalued tech stocks and a rotation towards a "sell software, buy hardware" style, rather than triggering a systemic collapse of global tech stocks. A recent survey by Bank of America Corp shows that fund managers' cash positions have dropped to 3.6%, with a bullish indicator reaching 9.4 in the extreme optimistic zone, indicating that market positions are crowded, and the buffer against negative surprises is thin. In this environment, if a company's performance is "good but below perfect expectations," the decline could be significantly amplified.