What IBM’s historic plunge means: Hardware is eating everyone’s cake!

What IBM’s historic plunge means: Hardware is eating everyone’s cake!

On Tuesday, IBM announced a bleak preliminary performance estimate, which directly dragged down the entire U.S. software sector. However, this news also pushed up the stock prices of hardware manufacturing companies such as chips and storage.

If artificial intelligence (AI) has seized the limelight of the software industry earlier this year, then IBM's profit warning this time has released a further clear signal: hardware may be eating away at the cake of everyone in the industry...

IBM's stock price suffered an epic sell-off during intraday trading on Tuesday, closing down 25.2%, the largest single-day drop since its listing. The company's preliminary second-quarter profit and revenue reports were far below market expectations.

This drop also refreshed IBM's previous historical record - the 23.7% drop set on Wall Street's "Black Monday" on October 19, 1987.

Although IBM CEO Arvind Krishna stated in a letter to shareholders that the company had anticipated supply chain-related headwinds, they clearly underestimated the extent of customers' tilt in quarterly capital expenditures: Faced with tight hardware such as servers, storage and memory chips that are in short supply and soaring in price, IBM's corporate customers are pouring their budgets into snap-up purchases, thus significantly reducing investment in related software.

"In this case, our team had to execute flawlessly, and we failed this quarter," Krishna noted.

"While we had expected some impact from supply chain-related factors, we did not expect such a large adjustment in capital expenditure priorities." The shortage of memory chips caused by the surge in AI demand has significantly pushed up chip prices, thereby driving up the prices of various products ranging from laptops to game consoles to AI data center servers.

Rising costs are squeezing technology budgets at large institutions, including the banking industry. These companies are IBM's core customer base.

In fact, before this, software-as-a-service (SaaS) vendors themselves were trying hard to eliminate market concerns that their business models might be disrupted by AI, while investors followed the trend and were pouring funds into hardware stocks that provide underlying computing power support for this technological change.

After IBM's announcement, the entire software sector was further impacted: ServiceNow fell 5.8%, Workday fell 3.5%, SAP fell 3.2%, and Salesforce fell 2.1%. Hardware is “eating everyone’s lunch” Morningstar analyst Luke Yang said that hardware is "eating everyone's lunch" and has become a core thread that cannot be ignored in the current market.

“A lot of money is flowing into hardware companies, and there’s not much left in other verticals,” he said bluntly. Susquehanna analyst James Friedman pointed out that the increase in the proportion of hardware configuration in the technology budget of enterprises is having a significant "crowding out effect" on expenditures in other technology areas.

"If you look at the technology budgets of the Fortune 500 or the Fortune 1000, the amount of funding is limited," Friedman said.

He explained that the reason these companies, many of which are IBM customers, have made infrastructure and hardware a top priority is because of the widespread belief that "it's better to buy today than tomorrow." As for IBM, Friedman said the company is "watching customers increasingly allocate budgets to memory and some hardware infrastructure that are different from the products they sell themselves." Gil Luria, director of technology research at D.A.

Davidson, also said, "This earnings season, there will be many companies falling into this category, and they will hear customers saying, 'We need to make room for AI in the budget.'" Data released by IBM on Tuesday showed that the company's preliminary estimated revenue in the second quarter was US$17.2 billion, a slight increase of only 1% year-on-year,

lower than the US$17.86 billion expected by analysts analyzed by FactSet; adjusted earnings per share were US$2.93, also lower than the US$3.01 consensus forecast by FactSet. IBM's challenges aren't limited to software. Sales of the company's flagship enterprise-class mainframe z17, built for the AI era, also fell short of expectations.

IBM said it expected infrastructure revenue to fall 7%, compared with its previous forecast of a low-single-digit decline. Jeffrey Favuzza, an equity trading analyst at Jefferies, said he thinks investors are watching whether IBM's preliminary results are "a sign of what's ahead for us" as ServiceNow and SAP's results are due next week.

Favuzza pointed out that if hardware giants Intel and Texas Instruments, which announce their financial reports next week, can deliver "amazing" answers, while the performance of software companies SAP and ServiceNow is "relatively flat," this will further confirm his judgment that "the semiconductor sector is still the most certain safe haven at the moment." It is worth noting that while IBM and software stocks fell sharply on Monday, chip stocks generally rose sharply.

Among storage device manufacturers, SanDisk shares rose 5% and Micron Technology rose 4.9%. Seagate Technology and Western Digital rose 2.1% and 1.4% respectively. In terms of other chip stocks, Intel rose 4.7%, AMD rose 2.6%, Marvell Technology closed up 2.3%, and Nvidia also surged 4.1%.

A set of comparisons shows that so far this year, the Philadelphia Semiconductor Index has soared 78.8%, while the iShares Extended Technology Software Industry ETF (IGV), which tracks the software sector, has fallen 11.4% in shock. (

#Stocks #Nvidia #AMD #Intel #AI