International Business Machines Corp. saw its shares slide 9.9% to $226.84 in late morning trading Thursday, even after the technology giant reported first-quarter revenue and profit that exceeded analyst expectations. The decline was driven by a combination of decelerating software growth and the company's decision to maintain its full-year 2026 outlook unchanged, leaving investors uneasy about the potential impact of artificial intelligence on key business segments.
Market Context and Sector Rotation
The selloff comes amid a broader downturn in software stocks, as market participants increasingly shift capital toward semiconductor companies perceived as direct beneficiaries of the AI boom. The iShares Expanded Tech-Software ETF has fallen roughly 16% year-to-date in 2026, while the iShares Semiconductor ETF has surged more than 43% over the same period. This stark divergence reflects growing investor anxiety that emerging AI technologies could automate significant portions of coding, workflow management, and legacy system maintenance—areas traditionally considered defensible revenue streams for software and consulting firms.
Quarterly Results
IBM reported first-quarter revenue of $15.92 billion, representing a 9% year-over-year increase. Adjusted earnings came in at $1.91 per share, surpassing the consensus estimate of $1.81 per share from LSEG data. Software revenue rose 11.3% to $7.05 billion, while consulting revenue grew 4% to $5.27 billion. Infrastructure revenue posted a robust 15.2% gain, reaching $3.33 billion. Despite these positive figures, the market focused on the slower pace of software expansion and the lack of an upward revision to the company's 2026 targets.
Outlook and Dividend
IBM reiterated its 2026 financial goals, which include more than 5% revenue growth at constant currency and approximately $1 billion in additional free cash flow. The unchanged outlook disappointed investors who had anticipated a potential upgrade following the strong quarterly performance. However, the company did announce a quarterly dividend increase to $1.69 per share, up from the previous level.
Management Commentary
CEO Arvind Krishna emphasized during the earnings call that AI "continues to be a tailwind for our global business." CFO James Kavanaugh reinforced this message, stating that "gen AI in modernization of mainframe is actually an accelerator." Kavanaugh also highlighted that free cash flow for the quarter reached $2.2 billion, marking IBM's strongest first-quarter performance in a decade. Additionally, he noted that clients using the watsonx Code Assistant for Z are expanding their mainframe processing capacity (MIPs) at triple the rate of those who have not adopted the tool.
Industry-Wide AI Jitters
The concerns surrounding IBM are not isolated. According to Reuters, ServiceNow's latest quarterly report stirred fresh AI-related jitters across the software sector. Shares of Microsoft and Adobe also slipped ahead of the market open, illustrating how a single cautious forecast can trigger sector-wide volatility. The risk became tangible in February when IBM shares experienced their steepest single-day decline in over 25 years after Anthropic claimed its Claude Code tool could update COBOL code "in quarters instead of years." Many banks, insurers, and government agencies still rely on COBOL, the decades-old programming language that powers IBM's mainframe systems.
Analyst Perspective
CFRA analyst Brooks Idlet acknowledged the market's heightened anxiety over AI competition this quarter but noted that first-quarter results did not validate those fears. "We do not think Q1's results validated those fears," Idlet said following the earnings release. However, the risk remains that if clients conclude AI can significantly reduce both time and headcount for legacy-code projects, IBM's software and consulting divisions may continue to experience uneven growth, even as mainframe sales hold up. Geopolitical tensions could also weigh on enterprise deal-making, adding further uncertainty to IBM's steady outlook.
Broader Implications
While IBM delivered another quarter of profit upside, solid infrastructure sales, and consistent cash generation, the anticipated acceleration in software momentum has yet to materialize. Management's decision to hold the line on 2026 targets, despite the strong start to the year, left investors questioning the company's growth trajectory in an increasingly AI-driven landscape. As the gap between AI winners and potential casualties widens, IBM finds itself navigating a delicate balance between capitalizing on AI opportunities and defending its traditional software and consulting businesses from disruption.
