IBM’s shares fell sharply in pre-market trading on Thursday after the company reported a slowdown in revenue growth, particularly in its software division, reigniting investor concerns over the impact of artificial intelligence on its core business.

The technology giant posted first-quarter results that exceeded Wall Street expectations, but the deceleration in growth and mounting fears of AI-led disruption weighed on sentiment, sending the stock down by 7%.

Revenue growth slows amid software concerns

IBM reported revenue of $15.92 billion for the quarter, up 9% from a year earlier but slower than the 12.2% growth recorded in the previous quarter.

The figure still came in ahead of analysts’ average estimate of $15.62 billion, according to LSEG data.

The company’s software segment, a key profit driver anchored by its hybrid cloud platform Red Hat and its Watsonx suite of artificial intelligence tools, showed signs of moderation.

Revenue in the division rose 11.3%, with analysts noting a further slowdown when adjusted for currency effects.

The results come at a time when concerns are growing that AI tools capable of automating routine corporate functions could disrupt traditional software businesses.

Those fears intensified earlier this year after Anthropic said one of its tools could help modernise COBOL, a programming language widely used in IBM’s mainframe systems.

"The stakes around these results were higher than normal given the software/services selling pressure the market has seen this year amid AI competition fears, and we do not think Q1’s results validated those fears," CFRA analyst Brooks Idlet said in a Reuters report.

Still, some analysts remain cautious.

Jefferies said software revenue growth of 8% at constant currency points to a clear deceleration, adding that concerns around AI competition continue to weigh on the company’s valuation.

Infrastructure strength offsets weakness

While software growth softened, IBM’s infrastructure business delivered a stronger performance.

Revenue in the segment rose 15.2% to $3.33 billion, supported by continued demand for its latest generation of mainframe systems.

The company’s leadership maintains that artificial intelligence remains a growth driver rather than a threat.

CEO Arvind Krishna said that "AI continues to be a tailwind for" the company’s global operations.

"IBM products and services are helping clients orchestrate, deploy and govern AI across hybrid environments," Krishna said in a statement.

Chief Financial Officer James Kavanaugh also pointed to the benefits of AI adoption within IBM’s core offerings.

"Gen AI in modernization of mainframe is actually an accelerator and accretive to the mainframe portfolio overall," he told Reuters, adding that clients using such tools are seeing increased consumption.

Outlook and competitive pressures

IBM reaffirmed its outlook, expecting revenue growth of more than 5% in constant currency in 2026 and a year-on-year increase of $1 billion in free cash flow.

Analysts say the company’s longstanding enterprise relationships and AI-focused products, including Watsonx Code Assistant, could help it compete with emerging AI tools.

However, competition remains intense, particularly from newer entrants targeting legacy systems.

Ahead of the print, RBC Capital Markets analyst Matthew Swanson noted that the strength in IBM’s previous earnings came "despite slower-than-expected growth" in Red Hat, highlighting ongoing concerns about the division’s trajectory.

He added that investor skepticism has centred on IBM’s "ability to return to growth in the consulting vertical while software growth, particularly Red Hat," remains under scrutiny.

Geopolitical risks appear contained

On a post-earnings call, Krishna downplayed the impact of geopolitical tensions, including the conflict in the Middle East.

He said IBM had recorded its strongest regional growth in decades and could manage disruptions from a potential closure of the Strait of Hormuz for several weeks.

Despite beating profit expectations, with adjusted earnings of $1.91 per share versus estimates of $1.81, IBM’s results underscore the balancing act facing the company as it navigates slowing software growth and intensifying competition in the age of artificial intelligence.

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