IBM shares plunge 25% as earnings miss and AI spending shift erode $68bn in value
Analyst downgrades and mixed hedge fund positioning follow the tech giant’s worst trading session on record
International Business Machines Corporation (IBM) shares fell 25.2% on July 14, wiping out approximately $68 billion in market capitalisation. The decline marked the company’s worst trading session on record and followed a preliminary second-quarter report that missed consensus estimates. Revenue rose just 1% to $17.2 billion, falling about $660 million short of the LSEG consensus, while adjusted earnings per share of $2.93 missed the $3.02 expectation.
The sell-off was driven by a combination of missed mainframe targets, delayed major deals, and a strategic misalignment regarding artificial intelligence investment. While Gartner forecasts worldwide AI spending will jump 47% to $2.59 trillion in 2026, with $1.43 trillion directed to infrastructure, that capital flowed towards hardware rather than IBM’s software portfolio. CEO Arvind Krishna issued an unscheduled investor letter admitting the company had "faltered," citing clients rushing to secure supply-constrained servers and storage ahead of expected price increases.
Operational metrics reflected the broader strategic challenges. Software growth slowed to 5% from 11% in the first quarter, consulting revenue remained flat, and infrastructure revenue fell 7%. Although distributed infrastructure revenue jumped 37%, this strength was overwhelmed by weakness in IBM Z and related Transaction Processing software. Several large deals slipped beyond the quarter, further dampening investor sentiment.
The market reaction also reflected a correction from a high valuation premium. Prior to the crash, IBM shares traded at roughly 26 times forward earnings after more than doubling in value over five years. The company has spent more than $50 billion since 2018 on acquisitions including Red Hat, HashiCorp, and Confluent. Analyst firm Oppenheimer downgraded the stock and abandoned its $350 price target, having previously modelled 12% software growth.
Institutional positioning was mixed ahead of the collapse. Short interest rose 14.5% by June 30 to 34.28 million shares, representing 3.66% of the float. Hedge fund activity varied significantly, with AQR more than doubling its stake and D.E. Shaw increasing its position by 80%, while Millennium cut its common-stock holding by 54%. The event underscores the risks of premium valuations when core growth drivers underperform.
