IBM shares crash 25% in worst single-day drop since 1961 on profit warning

Author: Brian Sozzi, Executive Editor Source: Yahoo Finance

IBM's (IBM) stock is likely to remain in the penalty box for an extended period following a shock profit warning.

Quick Insight: Big Blue's stock crashed 25% on Tuesday — its worst single-day decline since 1961. The previous record was a 23% drop in a single session in October 1987. Shares were up slightly in premarket trading on Wednesday.

"I think that this is one that you're going to have to wait, and it's going to be in the penalty box for a while as they adjust their business."

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— Thomas Martin, Senior Portfolio Manager, Globalt Investments, speaking on Yahoo Finance's Opening Bid

What's Behind the Move

IBM reported expected second-quarter sales of $17.2 billion, below analyst estimates of $17.85 billion. Non-GAAP earnings are projected at $2.93, compared to estimates of $3.02.

In a letter to investors, IBM CEO Arvind Krishna explained:

"When we discussed our expectations with you in April, we noted that we would be wrapping on the launch of z17 in the second quarter. Given this was the strongest start to a mainframe program in our history, we expected Infrastructure revenue to decline low-single digits for the year, beginning this quarter. What played out was worse than our expectations, driven by a shortfall in our Z performance and the associated software stack, primarily in Transaction Processing."

He added:

"In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases. This dynamic impacted client buying patterns. While we anticipated some supply chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization. In addition, clients were distracted with rapidly-evolving, industry-wide cybersecurity concerns in the quarter."

What Wall Street Is Saying

• Citi Analyst Fatima Boolani: "In what we garner is now a likely wider-dispersion for 2026/2027 expectations, renewed and emboldened 'AI-disruptee/AI-loser' concerns, we anticipate shares to be tethered."

• Goldman Sachs Analyst James Schneider: "We believe the mainframe shortfall reflects client demand re-prioritization toward near-term server and other hardware purchases given surging memory and component prices, a dynamic consistent with what peers such as Dell and HP have cited. This reprioritization also drove a shortfall in Transaction Processing because of perpetual licenses tied to new mainframe purchases. In addition, we believe the company's Data & Automation software segment saw weaker demand due to company-specific execution issues."

The Bottom Line

IBM's stay in the penalty box is well-deserved. To regain investor trust, the company will need to stack several consecutive comeback quarters.

Brian Sozzi is Yahoo Finance's Executive Editor, host of the 'Power Players With Brian Sozzi' podcast, and a member of Yahoo Finance's editorial leadership team. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.

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