IBM's "blowup" is just the beginning? Bernstein: Major shift in industry budgets, funds are accelerating their withdrawal from traditional IT

IBM's "blowup" is just the beginning? Bernstein: Major shift in industry budgets, funds are accelerating their withdrawal from traditional IT

IBM issued an early earnings warning for the second quarter of 2026, with both revenue and earnings per share significantly below market expectations, triggered by an unexpected collapse in demand for mainframes.

Bernstein's latest Chief Information Officer (CIO) survey indicates that this shock is not an isolated event, but a concentrated reflection of the structural trend of enterprise IT budgets accelerating towards generative AI and cybersecurity.

IBM's preliminary second quarter revenue was reported at $17.2 billion, about 4% lower than Bernstein's estimate of $17.961 billion and the market's consensus of $17.858 billion; preliminary non-GAAP earnings per share were $2.93, also below Bernstein's estimate of $3.09 and the market consensus of $3.03.

In a letter to investors, IBM attributed the cause to a change in customer procurement patterns—companies are proactively redirecting budgets toward supply-constrained infrastructure such as servers, storage, and memory to avoid anticipated price pressure. However, Bernstein's CIO survey points to a more concerning long-term trend:

In the May 2026 survey, 33% of CIOs plan to reduce mainframe MIPS capacity within the next five years, up sharply from 23% in November 2025; meanwhile, the proportion of CIOs planning to completely migrate away from mainframe platforms also rose to 14%. This data shows that clients' strategic retreat from mainframes is accelerating, and is not just a fluctuation in procurement cycles.

IBM's stock closed at $217.07 on Tuesday, and continued to fall 0.72% in intraday trading on Wednesday as of press time; cumulative decline for the year has reached 26.7%, with an excess decline of as much as 36.9 percentage points relative to the S&P 500.

Software Business Diverges, Red Hat Becomes a Rare Bright Spot

Although the overall growth of the software business disappointed the market, Bernstein believes this downturn is highly concentrated in certain business lines and not a signal of comprehensive deterioration.

IBM management made it clear that the gap in software is mainly driven by transaction processing software directly tied to the underperformance of the Z17 mainframe, rather than the broader software portfolio.

In contrast, Red Hat is still expected to achieve about 11% revenue growth and maintain a healthy trajectory. Bernstein therefore characterizes this shortfall in the software business as cyclical volatility in transaction processing, rather than a precursor to systemic setbacks for IBM’s hybrid cloud and AI software strategy.

Investors need to distinguish between the two: First, contraction in traditional software revenue highly tied to mainframe sales; second, whether IBM’s core software growth engine remains sustainable.

Consulting Business Stagnates, CIOs Accelerate Turn Toward AI Automation

The consulting business also failed to provide support. IBM’s preliminary consulting revenue for the second quarter was about $5.338 billion, flat year-on-year, below Bernstein’s estimate of $5.508 billion and the market consensus of $5.433 billion.

Bernstein’s CIO survey shows there is structural pressure behind this stagnation. In the May 2026 survey, net -15% of CIOs expect to increase usage of third-party IT consultants within the year—which means there are clearly more opponents than supporters, a significant deterioration from previous surveys.

The survey also shows that companies are reallocating budgets originally used for external consulting towards internal AI and large language model (LLM) deployments.The willingness of CIOs to seek assistance from consulting firms for AI/LLM development and deployment has also declined in recent surveys, further compressing demand for IBM’s consulting business.

CIO Spending Intent at Historic Low, Pressure May Continue to Spread

Of all the negative signals, perhaps the most far-reaching impact on IBM is the continued deterioration of overall CIO spending intentions.

Bernstein’s May 2026 CIO survey shows that net 54% of CIOs plan to reduce spending on IBM, marking the worst result in the history of the survey, further deteriorating from net 49% in November 2025. Among all major hardware vendors tracked by Bernstein, IBM ranks at the bottom in customer spending intention.

Bernstein points out that this trend reflects that investors and enterprise clients are systematically moving away from mainframes, traditional infrastructure, and IT consulting—shifting budgets to generative AI products and cybersecurity at an accelerated pace.

Against this backdrop, IBM faces not only the challenge of repairing quarterly performance in the short term, but more fundamentally, how to redefine its identity amid rapidly shifting IT budget landscapes.

Bernstein currently maintains a "market perform" rating on IBM, with a target price of $280, implying a potential upside of about 29% over the current share price, but further top-end risks cannot be ignored.

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