IBM issued a stark warning Tuesday, forecasting second-quarter revenue below analyst estimates. The announcement triggered a sharp sell-off across the software sector.
The company's shares plummeted 20% in premarket trading. The drop dragged other major software stocks and Dow futures lower.
IBM CEO Arvind Krishna pointed to a fundamental shift in corporate spending. He told investors that clients are rapidly repurposing their capital expenditure budgets.
"Clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure," Krishna wrote. He said the company did not anticipate the "magnitude of the capex reprioritization."
This trend shows the AI boom is directly squeezing traditional software budgets. Companies are prioritizing spending on the data-center hardware needed to run AI models over purchasing new software.
The company expects quarterly revenue of $17.2 billion. This falls short of the $17.86 billion estimate from analysts. Adjusted earnings per share are also projected to miss targets.
The news sparked a sector-wide rout. The iShares Expanded Tech-Software Sector ETF fell more than 4%. Major players like Microsoft, ServiceNow, and Salesforce dropped between 3% and 5%.
"This is an ugly moment for IBM and software stocks," said Chris Beauchamp, chief market analyst at IG Group. "The big question will be how long the shift to infrastructure and cybersecurity lasts."