International Business Machines Corporation (NYSE:IBM)‘s stock dropped 25% on July 14. That’s the worst single day for the stock since records began in 1968, even worse than its previous record drop on October 19, 1987. By the end of the week, IBM’s total value was just under $200 billion. The drop happened because IBM warned that its second-quarter results would come in weak. The firm said it earned $2.93 per share on $17.2 billion in revenue. Wall Street had expected $3.01 per share and $17.86 billion in revenue, according to FactSet.
CEO Arvind Krishna explained why in a letter to investors. In late June, he said companies started spending their money on servers, storage, and memory chips instead of IBM’s usual products. They wanted to buy AI hardware before prices went up. He said IBM expected some of this but not this much. Several big deals also didn’t close in time. Krishna also told CNBC that Anthropic’s Mythos AI model is making some companies pause their cybersecurity spending while they figure out what they actually need, and that pause is holding up some IBM deals too. But Krishna was clear on one point: “We don’t see our software being disrupted by AI at all.”
This isn’t IBM’s first AI scare this year, and Krishna is saying the same thing he said last time. Back in February, Anthropic released a tool that rewrites old computer code called Cobol. Investors worried this would hurt IBM’s older software business, and the stock had its worst day in 25 years at that point. Krishna said investors were overreacting. He turned out to be right, and by June the stock had bounced back to new highs. Now the stock has fallen even further, and Krishna is again telling investors not to worry.
That raises a real question. Is the market overreacting again like it did in February? Or has it finally caught onto a real problem that Krishna still would not admit to?
BULL CASE
Here’s the case for buying International Business Machines Corporation (NYSE:IBM). The quarter right before this one was actually strong. Software sales grew 11% to $7.05 billion, and IBM beat expectations on both earnings and revenue. This doesn’t look like a company that was already falling apart. Krishna’s story also makes some sense: deals that get delayed aren’t the same as deals that disappear forever. Traders in the options market seem unsure which way this will go too, not convinced IBM is doomed. Right after the crash, the cost of betting on big price swings in IBM stock hit one of its highest levels ever, even higher than during past market scares like the 2022 interest rate shock. That tells us traders think the stock could move sharply in either direction, not that they’ve already written it off.
IBM is also building for the future. It’s working with the U.S. Commerce Department to build a factory for quantum computing chips. Krishna wants IBM’s first large working quantum computer ready by 2029. He compares this bet to how Nvidia Corporation (NASDAQ:NVDA)’s chips created a huge new growth business through AI.
BEAR CASE
Here’s the case against IBM. This problem isn’t just about IBM. Bloomberg reports that Salesforce and ServiceNow, two other software companies seen as AI “outsiders” like IBM, have both lost about a third of their value this year. Workday and SAP are expected to feel the same pain soon. Software stocks in general are now cheap by historical standards, while computer chip stocks are up 62% this year and cybersecurity stocks are up 46% as of July 17 and sitting at record highs. A strategist, Brian Mulberry, put it simply: companies still want what International Business Machines Corporation (NYSE:IBM) sells, but they just don’t have enough money left to buy it because they’re spending it all on AI first. As for the quantum computing bet, some experts don’t think the technology will be ready to make money for at least another 10 years, well past Krishna’s 2029 goal. That’s a long time to wait for a payoff, especially for a stock that just lost a quarter of its value in one day.
INSIDER MONKEY’S HEDGE FUND DATA ANALYSIS
Insider Monkey’s hedge fund database shows that 59 hedge funds owned IBM stock at the end of Q1 2026. That’s down from 63 the quarter before, and this was before the crash even happened. For comparison, Microsoft Corporation (NASDAQ:MSFT) had 282 hedge funds holding its stock in the same period. So even before this bad quarter, big investors weren’t especially excited about IBM.
CONCLUSION
Krishna has already won this fight with investors once. In February, he said the market was wrong to panic, and then by June, the stock proved him right. This time the drop is bigger, and the reasons behind it are harder to untangle, and it’s not just about International Business Machines Corporation (NYSE:IBM). The whole software industry is losing budget to AI spending right now. IBM will share its full results on Wednesday. The real question isn’t just the numbers. It’s whether Krishna can tell investors what the next six months will look like. If he can’t answer that, it means even he doesn’t know when his customers will start spending again, and that would turn this from a one-time bad quarter into a much bigger problem.
While we acknowledge the risk and potential of IBM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than IBM and that has 10,000% upside potential, check out our report about this cheapest AI stock.
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