IBM Stock Crashes 26% as AI Spending Shift Hammers Legacy Business

IBM delivered a sobering message to investors this week: the company failed to anticipate how dramatically enterprises would redirect technology budgets away from traditional infrastructure toward AI computing resources. The admission sent IBM's stock tumbling as much as 26% in a single trading session — the worst intraday decline since at least 1968, according to Bloomberg data.

Why it matters

IBM's earnings warning signals that the AI revolution is creating winners and losers faster than many incumbents expected. As enterprises pour capital into GPUs, specialized servers, and storage to support AI workloads, legacy software and hardware vendors face budget compression even as overall tech spending remains robust. The shift reveals how zero-sum AI investment decisions have become.

What IBM's CEO told investors

In a preliminary second-quarter earnings letter to shareholders, CEO Arvind Krishna acknowledged the company "faltered" in adapting to changing customer priorities. "We did not anticipate the magnitude of the capex reprioritization," Krishna wrote, noting that clients were simultaneously managing cybersecurity demands created by emerging AI threats.

The impact showed up most clearly in IBM's Z platform business — the mainframe systems that process financial transactions, airline reservations, and other mission-critical workloads for many of the world's largest organizations. Despite launching the AI-focused z17 generation in 2025 in what IBM called its strongest second-quarter product debut ever, the company reported a "shortfall" in recent sales as "numerous large deals failed to close on the timelines we expected."

Krishna pointed to a specific dynamic in late June: customers shifted quarterly capital expenditure toward servers, storage, and memory to secure supply-constrained infrastructure ahead of anticipated price increases. Rising chip costs left less budget room for IBM's core offerings.

The financial damage

IBM now expects software revenue to grow just 5% — half the 10% Wall Street had projected, according to Evercore ISI analysts. Infrastructure revenue is forecast to decline 7%, worse than the expected 3% drop. "This is a major miss that will rattle many," Baird managing director Ted Mortonson said in a statement to Axios, which first reported the details.

AI spending faces its own pressures

The irony is that AI budgets themselves are coming under scrutiny. Companies are implementing usage caps and shifting to lower-cost models to preserve funds, according to UBS analyst Taylor McGinnis. The spending reallocation that hurt IBM may prove temporary if AI investment also moderates.

IBM's quantum computing bet

Krishna highlighted quantum computing as a potential new revenue source. The company recently announced a partnership with the U.S. Department of Commerce to build Anderon, a quantum wafer foundry backed by $1 billion in federal funding matched by IBM. Krishna said IBM remains "on track to deliver the first large-scale fault-tolerant quantum computer by 2029."

The earnings warning and stock decline were first reported by Axios.