Why Did IBM Stock Plunge 25% in One Day? Preliminary Q2 Results Were Weak, But Not Terrible

On Tuesday, July 14, IBM (NYSE: IBM) stock plunged 25.2% after the technology giant released selected preliminary second-quarter 2026 financial results. Its full, official report is scheduled to be released on Wednesday, July 22, after the market closes.

This was Big Blue stock's largest percentage drop since at least January 1968, when modern daily pricing records began. And it was the largest-ever drop in dollar terms, with shares losing more than $73, falling from $290.23 to $217.07.

It is very unusual for a well-established, profitable, large-cap company -- a so-called blue chip company -- like IBM to suffer such a steep one-day stock loss. Granted, the preliminary Q2 results were not good, but they weren't terrible either, so why such a massive sell-off?

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Second-quarter 2026 preliminary results missed Wall Street's expectations

In a letter to shareholders, CEO Arvind Krishna said IBM expects to report Q2 revenue increased 1% year over year to $17.2 billion and adjusted earnings per share (EPS) – what the company calls "operating EPS" – increased 4.6% to $2.93 when it releases its official report.

Both results fell notably short of Wall Street's consensus estimates, which were for revenue to rise 5% to $17.86 billion and adjusted EPS to grow 7.9% to $3.02.

Breaking down the total revenue growth of 1% year over year, software revenue was up 5%, consulting revenue was flat, and infrastructure revenue was down 7%.

Q2 preliminary results fell short of IBM's own guidance, too

Big Blue's preliminary results also missed its own expectations. Here's part of what CFO Jim Kavanaugh had to say about the company's annual and second-quarter revenue guidance on the first-quarter earnings call in April:

The strong start to the year drives our confidence in delivering constant-currency revenue growth of 5-plus percent in 2026... Our revenue expectations are underpinned by our accelerating software business, which we now expect to grow 10-plus percent this year.

Looking to the second quarter, we expect our constant-currency revenue growth rate to be similar to the full-year rate [5%].

What did the CEO attribute as the reasons for the disappointing preliminary Q2 results?

The software and infrastructure segments underperformed the company's expectations. Here's what Krishna said in the investor letter:

[W]e expected Infrastructure revenue to decline low-single digits for the year, beginning this quarter. What played out was worse than our expectations, driven by a shortfall in our Z [mainframe] performance and the associated software stack, primarily in Transaction Processing. 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. [Emphasis mine] ... While we anticipated some supply chain-related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization.

This capital expenditure shift among major customers involved increased spending on artificial intelligence (AI)-enabling hardware at the expense of IBM's largely software offerings.

Why such a huge stock drop, as the preliminary results were not terrible?

The huge stock drop in the face of disappointing but not terrible quarterly results suggests that a good number of investors expect Q2 to not be a one-off and anticipate that the company will likely cut its 2026 annual guidance on July 22, when it releases its full, official results. I think it's more likely than not that IBM will lower its annual guidance.

Investors have had high expectations of IBM. After all, IBM stock has had a strong run in recent years. Before Tuesday's sell-off, shares had returned 139% over three years – nearly twice the S&P 500's index 73%.

What should an investor do now?

I would not recommend making an investing decision about IBM stock now, as there are too many uncertainties. Wait until at least after the upcoming earnings call, when we should learn whether the large deals IBM expected in the second quarter but did not materialize were simply pushed back or halted indefinitely. That's a crucial difference.

Some investors buy IBM stock largely for its dividend, so it makes good sense for them to keep holding the shares. On that note, a silver lining to the stock sell-off is that the dividend yield has increased. Shares are now yielding about 3.18%, as of Friday's market close. IBM has increased its quarterly cash dividend for 31 consecutive years.

Another good reason to hold shares is that IBM is widely considered a leader in quantum computing. It was an early entrant in this developing technology and could be a major beneficiary once the tech begins to be widely commercialized.

Beth McKenna has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines. The Motley Fool has a disclosure policy.