Key Highlights

● IBM's chief executive said customers are weighing the true return on their AI budgets.

● IBM reported adjusted earnings of $2.95 a share on revenue of $17.1 billion.

● IBM shares recovered from an early slide to end roughly flat.

● IBM raised its free cash flow guidance and kept its full-year revenue growth outlook.

IBM (NYSE:IBM) chief executive Arvind Krishna gave Wall Street a blunt reading of the mood among corporate technology buyers, and it arrived at an awkward moment for the AI trade.

Speaking after the company's third-quarter results, released after the close on Wednesday, Krishna said customers are now weighing the payoff from their artificial intelligence budgets far more carefully. "They are also getting worried if some of the AI spending is completely out of control with no real return," he said, according to a live market blog.

By the close on Thursday, October 22, the Nasdaq Composite had tumbled 694 points to 26,008.86, its steepest drop since June 5, while the S&P 500 fell 93.74 points to 7,663.43 in its worst day since July. Shares of IBM, however, told a different story.

What Krishna said

According to one market report, Krishna said customers have become "a lot more cognizant and a lot more aware of what is the true ROI of all of their AI spend." He did not frame that as a threat to IBM. Instead, he presented it as an opportunity. "That is the tailwind for us," he said.

Still, the comment struck a nerve. It came as Meta Platforms (NASDAQ:META) laid out heavy AI spending plans and roughly $825 billion in spending commitments, according to reports, and alongside a supply warning from chip equipment maker Lam Research (NASDAQ:LRCX).

The quarter behind the comments

IBM's results were mixed under the surface. Adjusted earnings came to $2.95 a share, ahead of estimates of $2.86 to $2.88. On a GAAP basis, earnings were $2.30 a share against expectations of $2.45. Revenue reached $17.1 billion, above the $16.84 billion analysts had forecast.

Software revenue grew to $7.8 billion, with Red Hat also expanding. But reports noted that about a quarter of the software growth came from what were described as "tens of slip deals" pushed out of the second quarter. The IBM Z mainframe business fell sharply.

The company kept its full-year constant-currency revenue growth outlook unchanged and raised its free cash flow guidance.

A dramatic reversal

The stock had a turbulent day. It slid sharply in premarket trading and was trading near $233.50 early in the session. By the close, it had clawed back all of those losses and ended the session roughly flat to slightly higher.

That rebound fit a broader pattern on Thursday. Investors dumped chipmakers and AI infrastructure names but bought software, services and defensive stocks. About two of every three S&P 500 stocks rose, according to market data, and consumer staples and health care both hit record highs.

The wider debate

Krishna's words echoed other voices. One market strategist said that "Investors are starting to realize that there are some holes in the AI story." Nvidia (NASDAQ:NVDA) CEO Jensen Huang, speaking at GTC Berlin, said "The demand of the capital is much greater than the availability of the capital."

Taken together, the remarks shifted the conversation from how much companies are spending on AI to whether that spending will earn its keep.

Hyperscaler Budgets Come Into Focus

Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) report on October 28, the same day the Federal Reserve announces its policy decision, and Amazon (NASDAQ:AMZN) follows on October 29. Investors will be listening for any sign that cloud customers are tightening their AI budgets, as Krishna suggested, or whether demand remains as strong as the hyperscalers have described. IBM's own software trajectory, after the slipped-deal boost, will also be in focus next quarter.