Software loses, hardware wins | Future Intelligence #18

This week delivered one of the clearest answers to the question of where money is flowing in the age of artificial intelligence. IBM lost $69 billion in a single day after admitting that clients are shifting budgets from software to AI hardware. And ASML raised its outlook for the second time this year because customers are accelerating EUV machine orders faster than anyone expected.

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IBM and the end of an era: clients are shifting money, the market is shifting value

IBM $IBM suffered its worst trading day in its 115-year history on Tuesday. The stock plunged 25.21% to $217, a steeper drop than Black Monday 1987, wiping out roughly $68.8 billion in market capitalization in just six and a half hours of trading.

What happened

CEO Arvind Krishna, in an unusual move, released preliminary second-quarter results eight days ahead of schedule. Revenue of $17.2 billion missed the consensus of $17.86 billion by $660 million, adjusted earnings per share of $2.93 fell short of the $3.01 estimate, and the company withdrew its full-year free cash flow outlook. Krishna admitted the company "stumbled" and that the problems are deeper than a one-off fluctuation. According to him, clients are "actively shifting budgets from software and mainframes to AI infrastructure"—that is, to servers, memory, and storage. He also mentioned that AI-powered cyber threats are forcing companies to "pause and reassess" how much they want to spend on traditional IT services, specifically naming Anthropic's Mythos model as forcing companies to "think about what they actually need from their IT."

Why it matters

The market's reaction was asymmetric, and that's the whole point of the story. While IBM fell, Dell gained 7.15%, NetApp 6.42%, Micron 5.64%, and SanDisk 5.02%. The cybersecurity sector bucked the trend: Palo Alto Networks rose 6.3%, CrowdStrike 4%, and Okta 3%. The market isn't reading IBM's drop as a problem for the entire IT sector, but as a shift in value from one layer to another. Software and mainframes are losing, while AI hardware and specialized cybersecurity are gaining.

But the contagion hit the broader software sector. Three out of five software stocks fell on Tuesday, and ServiceNow and Atlassian lost 3% to 6%. HSBC immediately downgraded IBM to Reduce with a price target of $191, another 9% below the current level. Bank of America adjusted its target to $280. Analysts warn that IBM's warning isn't just about one company, but about a structural shift in how businesses allocate IT budgets in the generative AI era.