IBM Stock Is Having the Worst Day in Its History

Shares of International Business Machines (NYSE:IBM) fell by as much as 25% today after management issued a stark warning about upcoming second-quarter earnings. IBM’s preliminary, lower-than-expected earnings showed a shortfall in the performance of its software and infrastructure division.

Management attributed the earnings shortfall to clients shifting their spending away from IBM products and instead dedicating capital expenditures to servers and storage ahead of expected price increases.

“This dynamic impacted client buying patterns,” CEO Arvind Krishna wrote in a letter to investors posted on IBM’s website. “While we anticipated some supply chain-related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization.”

Image source: The Motley Fool.

“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, driving the majority of our shortfall. These are not excuses, but they are realities,” he wrote.

The drop in shares pushed IBM stock into bear market territory -- the stock is now down 26% on the year. It’s on track to be the biggest drop in company history, worse than the Black Monday tumble of 23.7% in 1987.

What happened to IBM?

IBM was looking for more revenue in the second quarter from its new z17 mainframes, which are designed to process AI workloads. The rollout was expected to be the strongest start to a mainframe program in IBM history, and the company would complete the launch by the end of the quarter.

However, the computing industry has been laser-focused on storage and memory products this year. Tech companies have been buying flash memory chips for data centers, and manufacturers have struggled to keep up with the demand. Sandisk reported data center revenue in its most recent quarter, jumping 233% sequentially to reach $1.5 billion. Micron Technology’s data center revenue increased 102% sequentially and 653% from a year ago to $11.52 billion.

IBM’s preliminary second-quarter earnings showed revenue of $17.2 billion, up 1% from a year ago. Infrastructure revenue was down 7%, while consulting revenue was flat and software revenue increased by 5%.

IBM’s warning was felt throughout the stock market, with software provider Salesforce dropping 4% in early morning trading before rebounding, and Microsoft slipping 3% before regaining its footing.

Meanwhile, storage companies were having a strong day; Micron stock was up 5% in afternoon trading, and Sandisk was up nearly 6%.

What happens next with IBM?

IBM is scheduled to report its full quarterly results after the market close on July 22, giving it a week to come up with a game plan. Krishna, in his letter to shareholders, said the company “are undertaking new initiatives and accelerating others, all to improve our results going forward.”

You can also expect IBM to focus investor attention on Red Hat revenue gains, which were up 11% in the quarter, and the company’s Distributed Infrastructure segment, which saw 37% gains with strong growth for power and storage products and a backlog of $500 million.

And IBM still plans to invest more than $10 billion in quantum computing in the next five years, and says it is on track to deliver the first large-scale fault-tolerant quantum computer by 2029.

But for now, IBM may have some difficult days in front of it. Analysts at HSBC have already downgraded the stock from “Hold” to “Reduce” and lowered the price target from $231 to $191.

Patrick Sanders has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines, Micron Technology, Microsoft, and Salesforce. The Motley Fool has a disclosure policy.