Shares of top software companies, including ServiceNow and Salesforce, fell on Tuesday after IBM reported preliminary quarterly results showing acute weakness in its software business and said clients were shifting spending to AI servers faster than anticipated.

ServiceNow stock declined 5.8%, while Adobe and Salesforce’s shares dropped 4.3% and 2.1%, respectively. Software heavyweight Microsoft closed 1.6% lower as well. The group edged higher in overnight trading, led by Microsoft, which rose 0.4%.

IBM’s Software Warning

"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," CEO Arvind Krishna said in a letter to investors.

"While we anticipated some supply-chain related impact in our expectations, we did not anticipate ​the magnitude of the capex reprioritization," Krishna said, adding that the company “faltered” and "numerous large deals" had failed to close as expected.

IBM said the weakness was largely in its mainframe business, which sells high-end enterprise computers and related software that power mission-critical workloads, including processing massive volumes of transactions for banks, governments, airlines, and retailers.

It also noted that businesses were prioritizing cybersecurity due to recent advances in AI, including the release of Anthropic’s powerful Mythos technology.

IBM Stock Hammered

IBM expects second-quarter revenue to rise 1% to $17.2 billion, with 5% growth in its software business and a 7% decline in its infrastructure business. The bottom-line figures were rather concerning, with the gross profit margin expected to drop by 100 basis points to 57.7%.

IBM shares dropped a record 25.2% on Tuesday. The company will issue the full quarterly report on July 22.

The comments intensified concerns about AI-driven disruption across the software industry, fears that have been building for months and weighing on software stocks.

Names such as Adobe, Salesforce, and Intuit have been among the hardest-hit tech stocks this year, prompting investors to debate whether the selloff has gone too far.

Retail View On SAAS Stay Dim, Eye Q2 Reports 

On Stocktwits, the retail sentiment was ‘bearish’ for NOW, CRM, and MSFT, and ‘extremely bearish’ for ADBE, as of late Tuesday.

“$ADBE $NOW $INTU Market conflating IBM's remark on softness in their hardware sales (and thus the software stack associated with that) to softness in SAAS. This is deliberate institutional ‘conflation’ not lazy analysis,”  a trader.

“There was less SAAS shorting and even some covering in the last couple of weeks but I'm pretty sure we will see that go up next several sessions until NOW reports next week. Could be an inflection point if positive.”