IBM shares dropped sharply in premarket trading on Tuesday after the company warned that customers had redirected spending from software to data centre hardware.
Pushing its second-quarter revenue below market expectations, the company’s stock was down about 23% before the opening bell after IBM released preliminary quarterly results that missed analysts’ forecasts.
The decline also weighed on the entire software sector, with Dow futures falling and the iShares Expanded Tech-Software Sector ETF losing more than 4%.
IBM now expects second-quarter revenue of $17.2 billion, below the $17.86 billion analysts surveyed by LSEG had projected. Adjusted earnings per share are expected to reach $2.93, missing estimates of $3.02.
Chief Executive Officer Arvind Krishna admitted the company had failed to respond quickly enough to changing customer spending priorities.
“This quarter we faltered.”
He added: “We did not adapt and move quickly enough, and numerous large deals failed to close on the timelines we expected, driving the majority of our shortfall.”
Krishna said IBM noticed a big shift in customer spending during the final weeks of June.
“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.”
He also said the company had expected some disruption from supply chain challenges but underestimated the scale of the change.
“While we anticipated some supply-chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritisation.”
The transition shows surging demand for hardware used in artificial intelligence systems. A global shortage of memory chips has also added to the problem.
Since late 2025, hardware prices have increased after major memory manufacturers, including Samsung, SK Hynix and Micron, directed more production towards specialised chips for AI data centres.
Much of that capacity has already been committed under long-term contracts, tightening supply for conventional servers, personal computers and smartphones.
Micron has previously warned that supply limitations are likely to continue.
“tight conditions to persist beyond calendar 2027 as a result of AI-driven demand across all segments coupled with structural supply constraints.”
IBM said revenue in its infrastructure business fell 7% during the quarter, even though total company revenue increased by 1% from a year earlier.
The disappointing update also hit other software companies. Microsoft, ServiceNow, Salesforce and Intuit each fell between 3% and 5% in premarket trading.
Chris Beauchamp, chief market analyst at IG Group, said investors are now watching closely to see how long businesses continue directing more of their technology budgets towards hardware and cybersecurity instead of software.
IBM is scheduled to release its full second-quarter financial results on July 22.
