IBM gets sucked into the AI-powered memory chip vortex

IBM gets sucked into the AI-powered memory chip vortex

By Alistair Barr

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Author of the Tech Memo newsletter

IBM's pre-earnings warning to investors reveals a new reality in the AI spending boom: There's only so much money to go around, so some tech companies are winning at the expense of others.

The company said customers are shifting technology budgets in two important ways. First, they're spending heavily on memory chips, servers, and storage to build AI infrastructure before expected price increases. Second, they're diverting more money toward cybersecurity as companies race to defend against new AI-powered threats.

The result is what amounts to a giant sucking sound across corporate IT budgets. Money flowing into AI is leaving less available for other technology purchases, including IBM's latest mainframe computers and the software that runs on them.

IBM said customers spent the final weeks of June buying servers, storage, and memory to lock in supply before prices rose, a much bigger shift than it expected. That hurt sales of its new Z mainframes and related software.

The company also blamed "rapidly evolving" cybersecurity concerns for delaying numerous large deals. IBM didn't identify the cause, but Barclays analysts said the comments likely refer to Anthropic's recently launched Mythos AI model, which has heightened concerns that AI can rapidly uncover software vulnerabilities. The analysts said companies appear to be accelerating security spending, potentially at the expense of other technology projects.

The market reacted accordingly. While IBM's stock plummeted nearly 25%, shares of memory companies rose, with SK Hynix surging more than 20% on Nasdaq on Tuesday. Shares of cybersecurity vendors, including CrowdStrike and Palo Alto Networks, also jumped.

The bigger question is whether IBM is experiencing a temporary budget shuffle or something more lasting. "There was no indication that this trend has yet abated," BNP Paribas analysts wrote in a note to investors on Tuesday. They expect IBM to share more on its outlook when the company reports results on July 22.

Barclays analysts argued the spending shift is probably temporary, with customers delaying mainframe purchases while they absorb higher infrastructure costs.

And this isn't likely the SaaSpocalypse: IBM's other software businesses, including Red Hat, continued to perform well, with revenue growth actually accelerating.

Let's call it the "Mainframe-alypse." Not sure that one will catch on.

Anyway, IBM's warning highlights a broader trend emerging across enterprise technology: AI is forcing companies to make difficult choices about how existing technology budgets are allocated, producing clear winners and losers.

There's only so much money to go around.

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Alistair Barr

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Alistair Barr is the author of Business Insider's Tech Memo newsletter. Sign up here. Before that, he was BI's Global Tech Editor and the Big Tech team leader at Bloomberg, following a reporting career at The Wall Street Journal, USA Today, Reuters, and MarketWatch. Alistair won a Gerald Loeb Award in 2007 for coverage of short selling and was a finalist in 2013 for scoops on the Facebook IPO. More recently, he won a 2024 San Francisco Press Club award for commentary. Got a tip? Reach out using the secure messaging app Signal (+1 415-341-4927) or via email on [email protected] oversees all things Big Tech, along with startups and venture capital. He writes analysis and columns about topics including generative AI, large language models, cloud computing, semiconductors, online search, e-commerce, EVs, robotics, and autonomous vehicles.Popular StoriesArtificial Intelligence:It's getting harder to make big leaps at the frontier of AIOpenAI's AI-adjusted earnings numbers have echoes of Groupon and WeWorkDeath by LLM: Stack Overflow's decline, and its plan to survive, shows the future of free online data in an AI worldCloud computing:Amazon dominated the first cloud era. The AI boom has kicked off Cloud 2.0, and the company doesn't have a head start this time.In cloud, there's AI (which is hot) and everything else (which is not)Chips:Why Intel is still so important: Real countries have fabsApple's made-in-the-USA chips signal a turnaround for the US's big semiconductor betEVs and Tesla:Tesla's AI supercomputer has a Silicon Valley town rushing to meet surging electricity demandTesla's Cybertruck is outselling almost every other EV in the USOnline Search:Google is losing its status as a verbA simple way to fix search: Bright pink ads