IBM: What Its Earnings Misses Say About the State of AI Right Now

Typically, when a company releases preliminary financial results before its official earnings release date, it's not to brag. It's because it wants to cushion the looming blow for investors. And that's exactly what IBM (NYSE: IBM) did on Tuesday, releasing preliminary second-quarter results ahead of its scheduled earnings release on July 22.

IBM expects revenue of $17.2 billion (up 1% year over year) and adjusted earnings per share of $2.93. Both figures were below analysts' expectations, but the bigger problem for IBM is the "why" behind the shortfall: a shift in AI spending habits.

IBM's leadership says that AI spenders are redirecting more of their budgets away from software and toward servers, storage, and memory, offering insight into the current state of AI development.

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Companies are trying to be proactive

As companies have continued to build data centers and other AI infrastructure, the need for storage and memory has increased dramatically, resulting in a severe shortage. And due to the law of supply and demand, that shortage has led to sharply higher prices for that hardware and these chips.

In his letter to shareholders published Tuesday, IBM CEO Arvind Krishna noted that many of its clients were rushing to purchase "servers, storage, and memory," anticipating more supply constraints and rising prices. If you know you'll need those products, it makes sense to buy them now before they become more expensive or simply unavailable.

Krishna noted that IBM didn't "anticipate the magnitude of the capex reprioritization" and was caught off guard. If this surprised IBM, it shows just how much companies are valuing data storage and memory hardware.

A zero-sum game for IBM

In Tuesday's trading session, IBM's stock dropped by 25%, its largest single-day drop in company history. Sure, investors weren't happy about the company's minimal revenue growth or its earnings miss, but I'm sure the shock factor ahead of the earnings report also played a big role.

On the other side of the coin, though, are flourishing memory companies such as SK Hynix, Micron, and Sandisk, which are some of the market's hottest stocks right now. SK Hynix just had its U.S. market debut after trading solely on the Korean Exchange for nearly three decades; Micron is up 728% in the past 12 months; and Sandisk is up by more than 4,700% since it was spun back off in February 2025 from Western Digital (which purchased it in 2016).

IBM's results and Krishna's letter reflect the changing priorities in the AI ecosystem, but it's important to remember how cyclical the memory and data storage space can be. Right now, the industry is riding high, but when supply eventually catches up with demand, the sector will likely cool off. Still, there's seemingly more value there now than in IBM's stock.

Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines and Micron Technology. The Motley Fool has a disclosure policy.