IBM’s stock plummeted 21.86% in pre-market trading on Tuesday, dropping to $226.80 after the company issued a rare preliminary revenue warning for the second quarter, falling short of Wall Street expectations. This decline erased nearly $60 billion in market capitalization from its previous close of $290.23.
The company revealed that its preliminary revenue stood at $17.2 billion, a 1% increase year-over-year but below the anticipated $17.86 billion according to analysts surveyed by FactSet. Adjusted earnings per share of $2.93 also missed the $3.01 consensus forecast.
Initially, shares decreased by 18% following the announcement, but as more investors reacted, losses deepened beyond 21%. This marks one of the most significant declines for IBM since 2000, coinciding with the tech bubble burst. The recent drop also reverses a rally that saw IBM shares exceeding $300 earlier in June, now positioning the stock closer to its 52-week low of $212.34 rather than its high of $332.46.
A detailed breakdown of revenue showed a 7% decline in infrastructure, a 5% increase in software, and flat results from consulting. The hardware sector suffered especially after IBM had launched its new z17 mainframe, which had previously achieved the best launch performance in the company's history.
UBS analyst David Vogt noted that revenue from Transaction Processing, linked to those mainframes, likely dropped by mid-teen percentages year-over-year, significantly impacting a unit that constitutes nearly 30% of IBM's software segment. IBM's CEO Arvind Krishna attributed the disappointing results to a miscalculation regarding a shift in client spending late in the quarter, alongside delays in securing new deals and distractions arising from widespread cybersecurity issues.
In a letter to investors, Krishna indicated that clients had redirected their quarterly capital expenditures toward server and memory purchases, anticipating price hikes amid supply constraints. This shift in spending behavior spotlighted broader concerns within the tech industry.
The fallout from IBM's warning rippled through the enterprise software sector, affecting companies like Workday and Salesforce, which dropped 10% and 6% respectively as investors adjusted their expectations. Analysts from Goldman Sachs highlighted that this earnings miss corroborates bearish sentiments regarding software stocks, with numerous companies experiencing declines in pre-market trading.
As the hardware segment continues to attract investment, semiconductors have outperformed major tech players during the first half of the year. TSMC reported record revenue from AI chips in June, while concerns over memory supply have spread to companies such as SanDisk, Micron, and Seagate. James Chanos, a notable short seller, had previously raised alarms over potential risks linked to AI budget reallocations for Software as a Service (SaaS) and IT services ahead of this earnings report.
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