IBM is in free fall.
As of this writing, shares of International Business Machines Corporation (NYSE: IBM) are currently down more than 23%. The reason? The hardware and software giant released a preliminary earnings report that warned its Q2 will come in below expectations when the official report comes out next week. It’s a shortfall that’s being caused by the AI boom.
Here’s what you need to know.
What’s happened?
Today, IBM issued a preliminary Q2 2026 earnings report warning investors that it expects revenue will be lower than previously expected. Its final Q2 numbers are expected with its ordinary Q2 earnings report on July 22.
Companies generally issue preliminary earnings reports when they are trying to cushion the blow of bad financial news that is expected soon. But today’s preliminary report appears to have done little to assuage investor fears.
In the preliminary report, IBM said that for its second quarter of fiscal 2026, it expects revenue of $17.2 billion, which is up 1%. It also said it expects a Non-GAAP Diluted Earnings Per Share (EPS) of $2.93, up 5%.
However, as noted by CNBC, these preliminary results are below what analysts were expecting, which was $17.86 billion in revenue, and an EPS of $3.01, according to FactSet data.
Beyond the lower-than-expected figures, the apparent reason for those low figures appears to be the main thing spooking investors.
Companies are shifting their capex to AI-related hardware
While many still think of IBM as a hardware company, the legacy tech giant’s business is now heavily software-focused.
It is a major player in the enterprise (B2B) market and provides software solutions for everything from security to data analytics to “middleware,” the software that lets myriad apps, databases, and platforms interconnect.
Software enterprise products are generally high-margin, making them great for a company’s bottom line. The problem for IBM is that the AI boom is causing many of its largest customers to cut spending on software services, allowing them to redirect funds to purchase the hardware components needed to build large AI data centers.
Such components include memory chips, CPUs, GPUs, and the like.
“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,” IBM CEO Arvind Krishna said. “This dynamic impacted client buying patterns.”
However, Krishna did not place the full blame on IBM’s customers. The CEO also pointed out that IBM itself dropped the ball because it “did not anticipate the magnitude of the capex reprioritization.”
“These conditions require our teams to execute perfectly, and this quarter we faltered. 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.”
How have other software stocks reacted?
While IBM’s Q2 seems to have taken a beating due to the capex reallocation, it is obviously not the only software firm operating in the enterprise space.
What many investors are now concerned about is how long any hardware-focused capex reallocation will last, and when companies will begin to return to software capex as usual.
Of course, there’s no way to predict when such moves will occur, and that uncertainty is reflected in the prices of other software stocks today.
In addition to IBM’s dramatic stock price fall, currently the stock prices of other major software solution providers are also down. This includes Microsoft Corporation (Nasdaq: MSFT), down about 1.6%, and Salesforce, Inc. (NYSE: CRM), down about 2.4%.
This is in contrast to the broader tech-heavy Nasdaq Composite, which is up 0.81% as of this writing.