Investment Thesis
The nearly 25% plunge in International Business Machines (NYSE:IBM) stock came as a sudden shock to everyone who had expected to see positive results in the preliminary Q2 2026 earnings report. But these figures represent more than just a local setback for a single technology company; they also signal, once again, confirmation of a tectonic shift as consumers transition from software to AI.
The financial setbacks at IBM are not a sign of operational failure on the part of management, nor are they an official symptom of how traditional software segments are becoming hostage to a deep structural crisis. What we are witnessing is a large-scale reassessment of early technologies, where there is a shift away from application software in favor of pragmatic AI applications. I still stand by my professional assessment: traditional software companies that lack a strong “moat” will continue to face pressure from sellers. Companies that are benefiting from the AI supercycle, on the other hand, will receive support from the next wave of capital reallocation.
An Analysis of IBM’s Decline in Q2 2026
IBM’s preliminary report figures fell short of Wall Street analysts’ consensus forecast. Rather than the expected revenue growth to $17.9 billion, the actual results came in at $17.2 billion—just 1% higher than the same period a year earlier. At the same time, EPS actually came in at $2.93, instead of the expected $3.02. Individual data on the company’s revenue breakdown by segment added fuel to the fire. The IT consulting segment showed virtually zero growth, whereas the infrastructure segment fell by 7%.
IBM’s management did not reassure the market; rather, they caused even greater panic by acknowledging their dismal results and previously inaccurate forecasts. CEO Arvind Krishna said that June 2026 turned out to be unexpected due to a shift in corporate clients’ priorities, who redirected their CapEx budgets from software purchases to servers, data storage systems, and other components for AI infrastructure. Confirmed shortages of goods such as memory chips are driving corporate clients to seek even more aggressively to secure supplies of hard-to-find equipment. The result is that contracts previously planned for software purchases have been reallocated to early reservations for computing hardware.
The Domino Effect as a Sign of a Systemic Crisis in the Software Sector
The pre-market reaction following the release of IBM’s preliminary data confirms investors’ fears that this problem is not isolated but systemic. IBM’s management certainly made certain individual miscalculations by failing to secure the expected contracts. But the ongoing shortage of AI hardware, with rising prices for essential computing components, is going to put even more pressure on the enterprise software segment. That’s one reason why shares of several major players in this sector have plummeted. ServiceNow (NOW) shares fell 7%, Salesforce (CRM) 5%, Workday (WDAY) 5%, and Accenture (ACN). Such giants as Microsoft (MSFT) and Adobe (ADBE) failed to meet expectations and also lost about 3% of their market value.
Cannibalization of IT budgets will become an increasingly significant reason why corporate clients will be less inclined to inflate their software procurement budgets. I believe that the top priority for companies in the software sector is to adopt AI. Companies such as NOW and MSFT are already undergoing structural transformation, introducing AI technologies to develop new products. As IBM has not followed this example, it will continue to face challenges, which is confirmed by its revenue and operating profit forecasts for the coming quarters.
image credit: Author
The Obsolescence of Traditional Software Will Continue
My other prediction is that the appeal of traditional software will continue to decline. At the moment, there’s a classic ROI crisis, since most products from IBM and other companies were developed during the cloud transformation. If these products were once considered the ideal solution for data aggregation and business process optimization, many customers now view them as outdated legacy systems. Less and less companies are willing to spend millions of dollars on consulting projects to implement heavy software. The primary goal of today’s businesses is to gain instant access to computing infrastructure to run their own AI models.
For example, consider ROI metrics for IBM and the companies benefiting from the AI supercycle. With Nvidia (NVDA) reporting a return on investment of 46.2%, Micron (MU) at 21.1%, and Alphabet (GOOGL) at 7.9%, IBM’s ROI stands at just 1.3%.
In addition, despite being positioned as a premium feature by manufacturers, customers perceive the addition of AI add-ons to many enterprise-grade products differently. This highlights a problem involving unrealistic expectations regarding the high value and cost of these features. History of technological development teaches us that every stage in the emergence of a new supercycle begins with infrastructure, and then moves on to applications. An example of this is railroads, which were built before trains began running on them. It was the same story with the creation of network infrastructure. It is the same today: first, investments in computing infrastructure are necessary, and then new services will be created.
IBM’s Warning—Not Just a Passing Storm
To sum up, I want to conclude that today’s warning from IBM in the form of preliminary data for Q2 2026 is not just a passing storm, it’s confirmation of a systemic crisis in the software sector. I rate IBM stock as “Sell,” whereas the main beneficiaries of the AI supercycle will be supported by capital reallocation. Traditional software is losing its margins due to declining demand, since the business model of corporate clients requires massive expenditures on hardware to build computing infrastructure. “Smart investors'” money should follow real cash flows, but today it is being diverted away from purchases of chips, servers, and memory. Reducing the share of traditional software is a painful decision, yet it is absolutely necessary to prepare for the growing role of infrastructure as the foundation of the future.
image credit: Author
Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.
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