IBM warns AI boom is squeezing software budgets, triggers sector rout

IBM sparked a market rout in the US on Tuesday after forecasting second-quarter revenue below estimates and signaling that businesses were favoring spending on data-center infrastructure over software, the starkest sign yet of AI's growing toll on the sector.

Shares of Big Blue slumped 20% in premarket trading, dragging other software stocks and Dow futures lower. The iShares Expanded Tech-Software Sector was last down more than 4%.

Software investors have long been on edge over fears that AI tools capable of automating routine work could pose an existential threat to the industry. Tuesday's announcement showed that even the boom in spending on servers, chips and networking gear for AI was eating into software budgets.

"In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases," IBM CEO Arvind Krishna said in a letter to investors.

"While we anticipated some supply-chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization," Krishna said, adding that the company had "faltered" in adapting quickly enough and that "numerous large deals" had failed to close as expected.

According to the preliminary results, the company expects revenue of $17.2 billion during the quarter, compared with analysts' estimate of $17.86 billion, according to data compiled by LSEG.

Adjusted earnings per share is expected to be $2.93, compared with the estimate of $3.02.

"This is an ugly moment for IBM and software stocks... the big question will be how long the shift to infrastructure and cybersecurity lasts," said Chris Beauchamp, chief market analyst at IG Group.

"A few more months might be bearable, but more than that and serious questions will be asked all over again about software stocks."

Microsoft, ServiceNow, Salesforce and Intuit fell between 3% and 5%. — Reuters