TLDR
- IBM stock crashed 25% on Tuesday — its worst single-day drop ever — after releasing dismal preliminary Q2 results
- CEO Arvind Krishna warned customers are shifting budgets toward AI hardware, away from software spending
- Revenue grew just 1% year over year in Q2, down sharply from 9% growth in Q1
- IBM’s P/E ratio has fallen to around 19, well below its five-year average, with UBS maintaining a $236 price target
- Red Hat posted 11% year-over-year revenue growth in Q2, offering a rare bright spot in the results
IBM stock was trading around $219 on Wednesday morning, up just 0.9% after Tuesday’s brutal 25% collapse — its worst session in company history.
International Business Machines Corporation, IBM
The selloff was triggered by preliminary Q2 results that badly missed expectations. CEO Arvind Krishna warned that customers were pulling back on software spending as high hardware costs — servers, data storage, memory chips — ate into their budgets.
Q2 revenue grew just 1% year over year. That’s a sharp slowdown from the 9% growth IBM posted in Q1, and it brought growth back to levels not seen since before Krishna pushed the company toward cloud and AI.
Software is now IBM’s biggest business, making up nearly 45% of revenue in Q1. But the segment’s annual growth rate fell from 11% in Q1 to just 5% in Q2. That’s the number that really rattled investors.
The infrastructure segment didn’t help either, posting a 7% annual revenue decline in Q2 — meaning IBM didn’t even benefit from the hardware spending boom it warned about.
Other software names got caught in the crossfire. Accenture slid 0.1%, ServiceNow dropped 5.76%, Adobe fell 4.26%, and Workday lost 3.49% on Tuesday. By Wednesday premarket, none had recovered meaningfully.
Is the Selloff Overdone?
At 18-to-19 times expected earnings, IBM is now trading near a multiyear low. As recently as last fall, the earnings multiple was above 40. UBS analyst David Vogt cut his EPS and revenue estimates but kept his $236 price target, calling the current valuation fair.
IDC analyst Ashish Nadkarni put it plainly: “While the market reaction was probably stronger than warranted, Krishna’s advance warning shouldn’t be ignored.”
A Silver Lining in Red Hat
Not everything in the preliminary report was bad news. Red Hat delivered 11% year-over-year revenue growth in Q2, showing that parts of IBM’s software business are still performing.
IBM is also deep into quantum computing. In May, the company announced Anderon, the first foundry built specifically for quantum wafers, backed by a $2 billion investment — $1 billion of which came from CHIPS Act funding. IBM plans to invest $10 billion in quantum technology over the next five years.
Despite Tuesday’s carnage, IBM’s total returns under Krishna have outpaced the S&P 500 over his six-year tenure.
The stock closed Tuesday at $216.59, down $73.65 on the day, within a 52-week range of $212.34 to $332.46.
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