The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Pranav Kiran

TORONTO, July 14 (Reuters Breakingviews) - The AI boom for computing infrastructure has caught IBM IBM.N off guard. Boss Arvind Krishna admitted the company misjudged the speed at which customers were shifting their spending away from software, prompting a plunge in the stock. His effort to re-orient the tech giant in the face of chatbot mania is getting tougher. It’s a warning for other firms trying to transform.

In a letter released on Tuesday, Krishna told investors that capital expenditures were flowing toward chips, servers and storage at a far faster pace than anticipated and that IBM failed to adapt to the new circumstances. The company expects second quarter revenue from its infrastructure unit, which includes its mainframe business, to fall 7% year-over-year. Overall, the top line is expected to grow only 1%, the slowest rate in four quarters. Shares of IBM cratered by a quarter in noon trading on Tuesday.

Since 2018, IBM has spent more than $50 billion buying its way into the artificial intelligence age with the purchases of Red Hat, HashiCorp and Confluent that helped boost its cloud credibility. Without its deal spree, IBM would be left leaning on a sluggish consulting business and mainframes. Investors rewarded IBM's reinvention. Before Tuesday's market value drop, the stock had more than doubled in the last five years and traded at about 26 times next-twelve-months earnings — a multiple surpassed only by Apple AAPL.O and Tesla TSLA.O among the Magnificent Seven, according to Visible Alpha data.

Now, data centers, graphics processors, and memory are what is in vogue, producing gains for the likes of Micron Technology MU.O, SK Hynix 000660.KS and Seagate Technology STX.O.

By contrast, the harder task of using AI software has not proven its use-case. That is compounded by pricing increasingly tied to specific outcomes rather than recurring subscriptions. IBM's warning triggered a broader selloff sending shares down in ServiceNow NOW.N, Atlassian TEAM.O and Adobe ADBE.O. If IBM struggles to put out the fire, others might too.

CONTEXT NEWS

IBM Chief Executive Arvind Krishna issued a letter on July 14 warning that the shift of customer spending away from software to servers, storage, and memory purchases happened at a much faster pace than anticipated.

“We did not adapt and move quickly enough, and numerous large deals failed to close on the timelines we expected, driving the majority of our shortfall,” he wrote.

The company forecast second quarter revenue to rise 1% year-over-year to $17.2 billion, the weakest growth rate since the first quarter of 2025.

Shares of IBM fell 25% in late morning trading.