International Business Machines (NYSE:IBM) closed Friday at $212.67, marking a staggering 26.0% decline for the week. The drop represents the steepest weekly fall in the company's history, wiping out approximately $69 billion in market capitalization. U.S. cash markets remained closed on Sunday, but the damage was already done.
Preliminary second-quarter results revealed a revenue shortfall of roughly $660 million against consensus estimates, with adjusted earnings per share coming in at $2.93, nine cents below expectations. The company is set to announce final results and its full-year forecast on Wednesday at 5 p.m. EDT.
The sell-off intensified on Tuesday, when shares plunged 25.2% in a single day, the largest one-day loss on record. By Friday, the stock slipped an additional 2.9%, bringing the weekly total to 26.0%. Investors appeared to reassess IBM's long-term growth trajectory rather than merely reacting to a single disappointing quarter. The market value lost was nearly 100 times the size of the revenue miss.
Key growth areas showed signs of strain. Software revenue rose just 5% in the second quarter, down from 11% growth in the prior quarter. Infrastructure revenue swung from 15% growth to a 7% decline. These shifts were reflected across multiple metrics, including a 70-basis-point drop in operating gross margin to 59.4%, though operating pretax margin improved by 30 basis points thanks to productivity gains.
CEO Arvind Krishna acknowledged the misstep, stating, "This quarter we faltered," and noted that clients redirected spending toward servers, storage, and memory in anticipation of price increases, causing several large deals to miss their scheduled closing timelines. "We failed to respond rapidly enough," he added.
Segment performance varied. Red Hat revenue grew 11%, and distributed infrastructure surged 37%, ending June with roughly $500 million in backlog. Consulting revenue held steady, with signings continuing to rise. However, the overall mix weighed on margins.
Since 2018, IBM has invested over $50 billion in acquisitions, including Red Hat, HashiCorp, and Confluent, to build a software-centric model. The second-quarter downturn now challenges the resilience of that approach. Cash flow provides some support, with free cash flow reaching $4.76 billion in the first half of the year. The company's earlier projection of approximately $15.7 billion for the full year implies about $10.9 billion in the second half, but IBM has not reiterated that target since its warning.
Investors are now focused on Wednesday's update, seeking clarity on the timeline for delayed deals and the outlook for transaction-processing software. The full-year revenue and cash flow guidance will be more critical than minor adjustments to preliminary quarter results. Analysts warn that weak software bookings could surface in upcoming reports, while the surge in hardware demand may prove temporary, potentially freeing up capital for postponed software spending. Prolonged pressure could erode IBM's revenue balance and test its acquisition-driven strategy.
U.S. markets resume trading on Monday. At $212.67, IBM trades at roughly 18.8 times trailing earnings, a valuation that suggests the market is not pricing the stock as a failing firm but is demanding a clearer growth narrative. All eyes turn to Wednesday.
