IBM shares tumble over 25% after earnings warning on weak mainframe sales

IBM’s shares slid more than a quarter on Tuesday after the company warned that second‑quarter revenue and earnings would fall short of Wall Street estimates. The pre‑announcement, delivered a week ahead of the scheduled earnings release, pinpointed a sharp slowdown in the new z17 mainframe line and its software stack, while customers redirected capital spending toward AI‑focused servers, storage and memory.

The market reaction was immediate. Trading at $216.10 in the morning, the stock was down 25.5 percent from the previous day’s close of $290.23, marking the steepest one‑day drop in IBM’s history and putting the decline on track to eclipse the 23.7 percent plunge recorded on Wall Street’s “Black Monday” in 1987.

Media additions

Why the warning matters now

Analysts had expected adjusted earnings per share of $3.02 on revenue of $17.86 billion. The preliminary figures showed adjusted EPS of $2.93 and revenue of $17.2 billion, a miss that sent ripples through software‑heavy indexes and dragged down peers such as ServiceNow, Salesforce and Microsoft.

CEO’s explanation

"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,"

Arvind Krishna, CEO, via The Guardian

"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,"

Arvind Krishna, CEO, via Yahoo Finance

"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,"

Arvind Krishna, CEO, via CRN

"In addition, clients were distracted with rapidly evolving, industry‑wide cybersecurity concerns in the quarter,"

Arvind Krishna, CEO, via CRN

"These conditions require our teams to execute perfectly, and this quarter we faltered. We did not adapt and move quickly enough, and numerous large deals failed to close on the timelines we expected, driving the majority of our shortfall,"

Arvind Krishna, CEO, via Morningstar

Krishna also highlighted areas of strength, noting 11 percent sequential growth in Red Hat revenue and a 37 percent surge in the Distributed Infrastructure segment, which now carries a backlog of roughly $500 million.

Key figures from the preliminary release

• Revenue: $17.2 billion (up 1 percent year‑over‑year)
• Adjusted EPS: $2.93 (below consensus of $3.02)
• GAAP EPS forecast: $2.27 (down 2 percent year‑over‑year)
• Infrastructure revenue: decline of 7 percent
• Software revenue: growth of 5 percent
• Consulting revenue: flat
• Gross margin (GAAP): 57.7 percent
• Operating cash flow (first half 2026): $7.8 billion
• Free cash flow (first half 2026): $4.8 billion

Timeline of events

Date	Event
Late June 2026	Clients accelerate purchases of servers, storage and memory amid memory‑chip shortage and anticipated price hikes.
June 30 2026	End of IBM’s second‑quarter reporting period.
July 14 2026	IBM issues earnings warning and releases preliminary Q2 results; shares tumble > 25 percent.
July 22 2026	IBM scheduled to publish full Q2 earnings and updated guidance.

Industry reaction

The sell‑off spilled over into the broader software sector. The iShares Expanded Tech‑Software Sector ETF fell more than 4 percent, while Microsoft, ServiceNow, Salesforce and Intuit each slipped between 3 percent and 5 percent.

Morningstar’s Daniel O’Regan of Mizuho observed that the warning confirms “AI infrastructure spend remains robust,” but cautioned that the impact may be “more negative for consulting and IT services than for the wider AI trade.”

What to watch next

• Full second‑quarter earnings release on July 22, which could adjust the preliminary numbers slightly.
• Market response to IBM’s quantum‑computing investment of more than $10 billion.