Cybersecurity and AI Chip Stocks Are Soaring, While Software Stocks Are Crashing. Blame IBM.

The stock market gained ground on Monday, with the S&P 500 and the Nasdaq Composite both rising. However, while some stocks raced higher, others plunged, as one technology company pre-announced results that pulled the market in different directions.

IT heavyweight International Business Machines (NYSE: IBM) provided an early glimpse into its second-quarter results, and what management had to say buoyed some segments of the market while tanking others.

Cybersecurity stocks CrowdStrike (NASDAQ: CRWD) and Okta (NASDAQ: OKTA) were both up more than 10% as of 1:45 p.m. ET., while artificial intelligence (AI) chip stocks Micron Technology (NASDAQ: MU) and Sandisk (NASDAQ: SNDK) were both up 5%. At the same time, however, enterprise software providers like ServiceNow (NYSE: NOW) and Microsoft (NASDAQ: MSFT) fell 4% and 1%, respectively.

Let's take a look at what IBM said and how it split the broader market.

Image source: Getty Images.

An ominous warning

In a letter to shareholders released Tuesday morning, IBM issued a stark warning ahead of its Q2 financial release, scheduled for July 22. The company's preliminary results showed revenue grew just 1% to $17.2 billion, resulting in adjusted earnings per share (EPS) of $2.27, up 5%.

The results were well below Wall Street's consensus estimates, which called for revenue of $17.85 billion and EPS of $3.02.

The shortfall sent IBM stock plunging as much as 26% in early trading and put it on track for its worst trading day in the company's history.

What the company had to say helps to explain the sweeping impact it had across a broad cross-section of the stock market. CEO Arvind Krishna noted that during 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."

While this was bad news for IBM, it served as a catalyst for flash memory and storage chipmakers, including Micron and Sandisk. Tight supply and soaring demand have fueled epic stock price runs for these companies. Even after a recent pullback, Micron stock has gained 694% over the past year (as of this writing), while Sandisk stock has soared a mind-boggling 3,750%. IBM's comments suggest that enterprise companies continue to shift spending to AI, which bodes well for Micron and Sandisk.

There's more. Krishna went on to say, "Clients were distracted with rapidly evolving, industrywide cybersecurity concerns in the quarter." In a subsequent interview, the chief executive expanded on his thinking, saying, "Mythos is making people pause to say, wait, how much do I need to spend on [cybersecurity]? They're pausing on new deals until they know."

When Anthropic unveiled its Mythos Preview earlier this year, the frontier AI model sent shockwaves through the cybersecurity industry, finding "thousands of zero-day vulnerabilities across critical infrastructure," including "every major operating system and web browser." These represented previously unidentified weaknesses that hackers could use to gain access to vulnerable software. CrowdStrike was one of only two cybersecurity companies initially tasked with helping to address these vulnerabilities.

While that spending shift means fewer dollars spent on IBM, it boosts the fortunes of cybersecurity providers like CrowdStrike and Okta.

However, software stocks took it on the chin, as investors feared the aforementioned shift in capex spending would spill over into other areas of enterprise spending. That would likely be bad news for companies like ServiceNow and Microsoft, which derive a large portion of their revenue from software sales.

Worries about the impact of AI have already roiled the enterprise software sector, sending Microsoft and ServiceNow down 23% and 43%, respectively, over the past year. IBM's commentary seemed to add weight to these concerns, further pressuring the stocks.

Many AI stocks have been taking a breather as investors take a step back to survey the landscape. If IBM's missive is any indication, businesses are continuing to spend heavily on AI adoption while not losing sight of the implications of these next-generation algorithms for cybersecurity.

Danny Vena, CPA has positions in CrowdStrike, Micron Technology, Microsoft, Okta, and Sandisk. The Motley Fool has positions in and recommends CrowdStrike, International Business Machines, Micron Technology, Microsoft, Okta, and ServiceNow. The Motley Fool has a disclosure policy.