The Story Behind IBM's Worst Share Plunge in Its History
The board of directors of International Business Machines (IBM) is facing a bitter reality after the company’s second-quarter performance was reported to be far below expectations. The artificial intelligence (AI) revolution, which was expected to be a growth engine, has instead applied pressure more quickly than anticipated, forcing the technology giant to make difficult decisions.
Following internal debate on how to deliver the bad news to the public, IBM CEO Arvind Krishna ultimately chose the path of transparency. In a letter to investors published on Tuesday morning, Krishna admitted the failure. ‘This quarter we stumbled,’ he wrote. The admission triggered market panic, causing IBM shares to plummet by 25 per cent, marking the worst day in the company’s more than a century-long history.
IBM, known for its long history from helping the moon landing mission to creating the Jeopardy! supercomputer, is now confronting the harsh reality of the AI boom. Although IBM actively helps customers adapt to the AI era, the company itself appeared unprepared for the speed of technological disruption.
Unlike AI infrastructure providers such as Nvidia or cloud giants like Google and Oracle that lease computing capacity, IBM’s business model relies heavily on selling hardware and software systems installed directly at customer sites. Currently, many corporate customers are beginning to shift their budgets away from traditional hardware upgrades towards AI infrastructure and cybersecurity.
Daniel Morgan, a portfolio manager at Synovus Trust, noted that customers now treat spending on IBM as discretionary. ‘Some may think to postpone mainframe upgrades for a few quarters because they are focused on building AI,’ he said.
Arvind Krishna, who has served as CEO since 2020, is now under significant pressure to quickly rectify the situation. Don Bilson of Gordon Haskett noted that Krishna must act swiftly to avoid being labelled as the executive responsible for this historic sell-off.
Under Krishna’s leadership, IBM has indeed undertaken significant strategic transformations, including the US$34 billion acquisition of Red Hat and the spin-off of its Kyndryl business. However, the decline in market capitalisation to below US$200 billion makes IBM appear small compared to competitors like Broadcom or AMD.
Despite the negative market reaction, some parties consider the sell-off excessive. Debanjan Saha, CEO of DataRobot and a former IBM executive, stated that the market punishment was disproportionate to the error. He stressed that IBM has a long history of successfully navigating various technological transitions, from the PC era to the internet.
However, Wall Street appears to be losing patience. Discussions have emerged regarding the possibility of activist investors pushing for a break-up of the company if performance does not improve within the next two to three quarters. IBM’s board of directors is scheduled to meet again at the end of July to monitor the leadership team’s progress in handling this crisis.
IBM Vice Chairman Gary Cohn offered a defence, suggesting that the shift in corporate technology budgets might only be temporary. He argued that companies are beginning to question the return on investment from massive AI spending and may eventually return to investing in proven enterprise infrastructure.