Early warning of performance leads to stock price plummeting; is IBM “backfiring” its own efforts?
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IBM hoped to gain trust through honesty, but ended up with the most brutal single-day stock price crash in its history.
On July 15, IBM issued a second quarter earnings warning ahead of schedule. CEO Arvind Krishna wrote directly in a public letter to investors: "We messed up this quarter." The letter was sent out a few hours before the market opened.
That day, IBM's stock price plunged 25% in a single day, marking the largest one-day drop in the 115-year history of the company, with its market value falling below $200 billion.
This crash immediately triggered a sharp question on Wall Street: Does proactively issuing a warning gain trust or just accelerate panic?
The Board's Choice: To Speak or Not to Speak
According to The Wall Street Journal, citing informed sources, after learning about the poor second quarter results, IBM's board faced a dilemma: either issue a warning in advance, or wait for the official earnings release a week later to communicate with investors.
Board members pressed CEO Krishna on the matter and ultimately decided to "take the pain proactively" and disclose early, hoping to gain market trust through transparency.
IBM Vice Chairman Gary Cohn later explained the logic behind this decision on CNBC: "Arvind took the initiative to say, 'I want to be transparent with the outside world. I don't want them to be caught off guard.'"
However, the market's reaction was clearly beyond expectations.
Why Did Performance Suddenly Worsen?
IBM's problem essentially lies in the "crowding out effect" brought by the AI wave.
Corporate IT budgets are limited. When massive funds flow into AI infrastructure—including computing power, storage, and networking—traditional hardware purchases and software system upgrades are postponed. IBM's client base consists mainly of large financial institutions and retailers, who are now viewing IBM's products as "expenses that can be delayed."
Daniel Morgan, portfolio manager and analyst at Synovus Trust, pointed out this logic directly: "You might hear people say, 'Let's pause for a few quarters... we don't need to upgrade to the new mainframe right now.' That's what’s hurting them."
Meanwhile, IBM's business model differs vastly from AI infrastructure beneficiaries like Nvidia, Google, and Oracle. The latter rent out computing power, sell chips, and provide network hardware, profiting directly from the AI investment boom. IBM, on the other hand, sells hardware and software systems for enterprises to deploy themselves; in this AI wave, it is the one being squeezed.
According to sources, IBM's top management is also discussing a deeper issue: whether the company is overly dependent on a handful of large customers, whose procurement cycles are inherently unstable and easily delayed during tight budgets. They talked about the need to expand to mid-sized enterprise clients, but this will take time to prove effective.
Market Value Shrinks, Breakup Rumors Abound
The consequences of this plunge go beyond stock price.
IBM's market value has fallen below $200 billion. For comparison, Broadcom—which was once seen as a "small supplier" to IBM—has a market cap of about $1.8 trillion, and AMD about $800 billion.
According to The Wall Street Journal, IBM and its advisors have realized that this negative news may make the company vulnerable to activist investors or could push the company to consider a breakup.
Wall Street has already started discussing this.
Don Bilson, head of event-driven research at Gordon Haskett, wrote in a report to clients that Krishna "needs to fix this problem quickly, because what a 63-year-old CEO can least afford is being labeled as 'inconsistent in execution, resulting in a historic plunge.'"
Insiders on the board also know the market has little patience. According to sources, board members believe Wall Street is unlikely to tolerate another two or three quarters of missed targets. The board is expected to convene again in late July.
Some Say: The Punishment Was Too Harsh
Not everyone thinks the market's reaction is reasonable.
Debanjan Saha, former IBM employee and current CEO of DataRobot, posted on LinkedIn to endorse Krishna's candor and also questioned whether the market overreacted.
"The punishment does not fit the crime," Saha wrote. "This selloff isn't because of one weak quarter. It's the market repricing a question: Can a 115-year-old enterprise company lead in the age of AI agents, or just survive it?"
He also listed IBM's past battles against antitrust, the PC wars, and the rise of the internet, saying, "Every time, the obituary was written too early, and this time is no different."
IBM Vice Chairman Cohn said on CNBC that changes in enterprise tech budgets may only be temporary. He noted that IT budgets set in previous months have been disrupted by high compute spending, companies are starting to question returns on investment, and some are considering whether they should return to investing in mature enterprise infrastructure.
Krishna’s Next Steps
Krishna joined IBM as a software engineer in 1990 and became CEO in 2020. He led the $34 billion acquisition of open-source software company Red Hat, which later became an important growth engine for IBM. Last year, IBM's software business generated about $30 billion in revenue, accounting for nearly half of its total $67.5 billion revenue.
He also promoted hybrid cloud and quantum computing strategies, spun off the IT outsourcing business Kyndryl, and acquired cloud software company HashiCorp.
In May this year, the Trump administration granted IBM $1 billion in quantum computing subsidies, and IBM soon announced it would invest another $1 billion of its own funds to build a quantum chip manufacturing facility, which briefly sent the stock price higher.
But all this accumulation was swiftly repriced by the market following a single quarterly warning.
Krishna has pledged to provide more details in next Wednesday's earnings call. In the open letter, he wrote: "We are confident in the strength of our business portfolio and the company's strategic transformation."
Whether the market buys it or not—the answer will be revealed on earnings day next week.
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