Here's What IBM's Profit Warning Tells Us About the AI Market Right Now -- and What It Means for Investors

Investors have focused closely on artificial intelligence (AI) stocks for the past few years. That's because these players have driven the performance of the S&P 500, extending this three-year-plus bull market. AI stocks have skyrocketed because investors see AI as the next game-changing technology, one that could transform how companies operate and send their earnings soaring.

Some have already delivered results, such as players that sell logic or memory chips, and companies that offer cloud services. They have been the early winners of the AI story. And investors have also bought shares of a wide range of companies that may benefit from AI down the road.

But in recent times, investors have become more hesitant about AI investing, with concerns about growth ahead. Against this backdrop, it's a good idea to look to technology companies for some clues.

International Business Machines Corp. (NYSE: IBM) shocked the market this week with a warning about its second-quarter profit. Let's consider what this warning tells us about the AI market right now and what it means for investors.

Image source: Getty Images.

The AI story so far

So first, a quick note on the AI story so far. In the early stages of the boom, customers rushed to get in on logic chips such as graphics processing units (GPUs) for the training of large language models. This helped boost the earnings of market leader Nvidia, as well as rivals including Advanced Micro Devices and Broadcom.

And cloud players, such as Amazon's Amazon Web Services, have also gained as they offer customers access to chips and other AI products and services.

But as the AI story evolves, other companies also will see significant growth opportunities, and the latest to explode higher have been those offering memory and storage. As AI is applied to real-world problems through AI agents, the need for these elements is greatly increasing. Meanwhile, the huge demand for memory has produced tight supply and rising prices -- all of this has resulted in a surge in revenue and stock performance for companies such as SK Hynix, Micron Technology, and Sandisk.

IBM's message

Now, let's consider the message from IBM. The technology giant, with businesses in hardware, software, and consulting, released preliminary second-quarter earnings -- and they missed expectations. IBM reported adjusted earnings per share of $2.93 and revenue of $17.2 billion. That's compared to analysts' estimates for $3.01 in EPS and revenue of $17.8 billion, CNBC reported, citing FactSet.

The reason? Customers favored spending on memory, servers, and storage amid tight supply and ahead of price increases, IBM said. As a result, IBM was unable to close a number of large deals according to the expected timeline, and this weighed on earnings.

What does this tell us about the AI market right now? First, it's important to note that this doesn't necessarily signal a long-term problem for companies such as IBM. This situation may be temporary, and customers' capital spending is likely to shift back to IBM and others in the space as memory supply and prices stabilize, or potentially even earlier.

A broad range of products and services

So this tells us that the AI market may benefit certain players at specific moments -- for example, today, the big winners are memory companies. But over time, a broad range of AI and general tech products and services is needed -- so trends like the one we're seeing now may not drastically change the outlook for a company such as IBM or others that might find themselves in a similar situation.

It will be important to see how long such periods last and how companies affected manage the headwinds and adjust their strategies. Though some investors may worry about the future of software as AI's uses multiply, giants like IBM or Microsoft may show resilience. These companies operate a wide range of businesses and have integrated AI into their software and processes -- so they may benefit from AI advancements.

What does all of this mean for investors? It's important to remember that there will be moments when GPU companies will benefit the most or memory players will stand out -- performance may ebb and flow.

But investors shouldn't rush to unload their current AI stocks and hop on the latest trend. Instead, it's a great idea to monitor how the market evolves and invest in a variety of potential AI winners, as together, over time, their products and services should deliver growth -- and that could help you score a long-term win in the AI market.

Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Broadcom, International Business Machines, Micron Technology, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.