Is the AI Boom Killing Traditional Software Stocks?

Something unusual happened on Tuesday. The wider market was rising, cheered by cooling inflation. Yet software stocks were being hammered.

The trigger was IBM (NYSE:IBM), which crashed about 25%, to US$216.88, a steeper one-day fall than it suffered in the 1987 Black Monday crash. Trading volume hit almost six times normal levels. And it did not fall alone. Salesforce, ServiceNow, Workday, and Adobe all tumbled with it. Here is why, and why it matters far beyond IBM.

What IBM Actually Said

IBM issued a rare preliminary warning ahead of its full results on 22 July, saying quarterly revenue would come in at about US$17.2 billion, below the US$17.9 billion expected. But the numbers were not the shock. The explanation was clear.

Chief executive Arvind Krishna admitted the company had “faltered”, and that “numerous large deals failed to close”. The reason he gave is the important part:

“In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases.”

In simple terms, businesses spent their technology budgets buying hardware instead of software.

Why This Threatens Every Software Company

Here is the chain of events, and it is worth understanding.

The AI boom has created a shortage of memory chips, and prices have soared. Companies now fear that if they wait, the hardware they need will cost even more, or simply be unavailable. So they are rushing to buy servers, storage and memory right now.

But a company’s tech budget is not infinite. Every dollar spent panic-buying hardware is a dollar not spent on software licences. So software contracts get delayed.

That is why the damage spread instantly. Salesforce (NYSE:CRM) fell as much as 9%, ServiceNow (NYSE:NOW) dropped 8%, Workday (NASDAQ:WDAY) slid nearly 10%, Adobe (NASDAQ:ADBE) lost 6%, and even Microsoft (NASDAQ:MSFT) fell 3%.

One analyst called it “an ugly moment for IBM and software stocks”. Another warned the update was a “devastating blow” to the sector.

Why Software Stocks Are Crashing: The Memory Squeeze

Step back, and the picture is striking. The same memory boom making chipmakers rich is now squeezing their own customers. Apple has called the shortage a “hundred-year flood”. IBM just lost a quarter of its value to it.

The clearest proof came from the market itself. On the very day IBM lost a quarter of its value, the chipmakers rose: Nvidia gained 4.2% and Intel jumped 5.5%. Money is not leaving technology. It is moving from the companies that buy hardware to the companies that sell it.

In our view, this is the AI trade entering a new, more uncomfortable phase: the winners are narrowing, and the bill is landing on everyone else.

The Investor’s Takeaway

So how worried should you be? Our take is: watch, do not panic.

There is a genuine case that this is mostly an IBM problem. Its shortfall was concentrated in its ageing mainframe business, and rivals like ServiceNow sell subscription software with billions in contracted revenue already locked in. A budget delay is not a cancellation.

But the risk is real. As one analyst put it, a few more months of this “might be bearable, but more than that and serious questions will be asked all over again about software stocks.”

Our view: this is not the moment to buy the dip in software blindly. The key test comes over the next fortnight, when ServiceNow and others report. If they show the same delayed deals, this is a sector problem, and today’s falls will look like a warning, not an overreaction. Until then, the safer place to be is the companies selling the hardware, not the ones being squeezed by it.