IBM stock posts worst drop since 1987 on AI spending shift

IBM shares plunged 24% in premarket trading Tuesday after the technology company unexpectedly released preliminary second-quarter earnings a week early. If the losses hold through the session, it will mark the stock's steepest single-day decline since Black Monday in 1987.

The company reported preliminary revenue of $17.2 billion for the quarter, a modest 1% increase from a year earlier. However, the underlying composition of that revenue revealed a stark divergence. Software sales grew 5%, while infrastructure revenue dropped 7%.

Chief Executive Arvind Krishna attributed the infrastructure shortfall to a rapid reallocation of corporate technology budgets toward artificial intelligence. "While we anticipated some supply chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization," Krishna said. "This quarter we faltered," he wrote in a letter to investors, admitting the company "did not adapt and move quickly enough" as customers redirected funds toward AI servers, storage and memory.

The sudden budget shift directly impacted IBM's flagship z17 mainframe, a system that powers everyday financial activity like credit card purchases, ATM withdrawals and stock trades. Despite IBM positioning the product as having the strongest launch in mainframe history, customers delayed purchases. Several large deals failed to close before the quarter ended.

"These are not excuses, but they are realities," Krishna wrote. For market participants, the earnings shock underscores a widening structural divide in the technology sector. As corporations aggressively prioritize capital expenditures for AI data center buildouts, capital is actively being drained from established enterprise IT projects.

This dynamic presents a concrete risk for investors holding legacy hardware and infrastructure stocks. Even when a core product like the z17 mainframe is integral to global financial plumbing, it remains vulnerable to being crowded out by the immediate urgency of AI deployment. IBM's early earnings release suggests the pace of this budget reallocation caught even major industry incumbents off guard.