IBM Shares Plunge After Sales Miss, CEO Says ‘We Faltered’

International Business Machines Corp. shares slid after the company reported preliminary second-quarter sales that fell short of expectations, attributing the miss to customers spending their money on chips and servers amid AI-fueled shortages.

Preliminary second-quarter revenue totaled $17.2 billion, IBM said in a statement on Tuesday, below analysts’ estimates of $17.9 billion. Sales from IBM’s infrastructure division were especially hard hit, dropping 7%. The company said it’s still reviewing its books and final results, set to post next week, may be slightly different.

Shares fell 22% in premarket trading before New York exchanges opened. If the declines hold, the stock will notch its biggest intraday loss since the 1980s. The results weighed on other software companies, with Workday Inc. shares down more than 8% and ServiceNow Inc. falling about 7.7%.

An unprecedented, global buildout of data centers key to powering artificial intelligence systems has brought about severe shortages of semiconductors, particularly memory chips. The supply squeeze has raised the costs of manufacturers of everything from iPads to Xbox consoles. And IBM’s results show it’s also forcing companies to shift their spending toward servers and chips, leaving less money for other technology such as IBM’s mainframes and software.

“Discretionary IT spending is worsening and will likely be the main theme across most software companies when they report results,” Bloomberg Intelligence analyst Anurag Rana said in a note.

IBM Chief Executive Officer Arvind Krishna said the company had expected supply-chain issues to weigh on results. But he said the company failed to predict that its customers would also end up shifting their spending away from IBM’s products to servers, storage and memory purchases to hedge against further price increases.

“What played out was worse than our expectations,” Krishna said in a letter to investors, adding that its Z mainframes and associated software accounted for much of the shortfall. “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.”

The blow to IBM’s hardware sales threaten to stymie its efforts to refashion itself into a high-growth software company through major acquisitions of Red Hat, HashiCorp and Confluent. Even the company’s new focus has made it a target for investors concerned that artificial intelligence tools will replace many current software products. In February, IBM saw a steep selloff after AI startup Anthropic PBC unveiled a tool that may help modernize a dated programming language that runs on IBM mainframes.

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The company also reported a 2% preliminary decline in diluted earnings to $2.27 a share.

IBM, like most software providers, has integrated AI into its products and touted its ability to provide customers with the latest technology. The company has tried to convince investors that AI will strengthen its business, not replace it. IBM executives have said AI-related work increases demand for IBM’s infrastructure software, which lets clients work with leading AI models.