Key Points
IBM's stock suffered its worst day in decades.
"This quarter we faltered," CEO Arvind Krishna said.
Shares of International Business Machines (NYSE: IBM) plunged on Tuesday after the tech giant warned of a projected profit shortfall.
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IBM's clients are shifting their tech spending to AI-related investments
IBM expects its second-quarter revenue to grow by just 1% to $17.2 billion, with earnings per share down 2% to $2.27.
Both figures were below Wall Street's estimates, which had called for revenue of nearly $17.9 billion and earnings of $3.01 per share.
In a letter to shareholders, CEO Arvind Krishna said that IBM's customers were spending more on servers, storage, and memory to lock in supply before providers raised prices. As a result, they spent less on IBM's software and infrastructure offerings.
Additionally, companies prioritized cybersecurity investments to counter new artificial intelligence (AI)-powered threats. In turn, they delayed other, non-cybersecurity deals with IBM.
"These are not excuses, but they are realities," Krishna said.
As risks rise, IBM's share price falls
Prior to today, many investors thought IBM had done enough to position itself as a beneficiary of the AI boom. Krishna's warnings, however, call those beliefs into question.
Shareholders are now forced to price in the potential disruption that AI-related spending can have on IBM's revenue streams, and its stock price is down sharply as a result.
Investors will want to tune into IBM's second-quarter earnings call on July 22 at 5 p.m. ET, during which Krishna will lay out his plan to adapt to these AI-driven trends.
Joe Tenebruso 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.