IBM Lost $31 Billion in 1 Day on AI Fears. Should You Buy the Dip?

IBM (IBM +2.60%) stock got hit hard in Monday’s trading as fears that artificial-intelligence (AI) technologies could disrupt the company’s common business-oriented language (COBOL) tech stack. The company’s share price fell more than 13% in the daily session, wiping roughly $31 billion off the legacy tech giant’s market capitalization.

After yesterday’s big sell-off, the stock is seeing a modest recovery. Shares were up 2.7% as of 3 p.m. ET. IBM stock is now down roughly 22% across this year’s trading.

Image source: Getty Images.

Investors are worried Anthropic and other AI leaders could disrupt IBM

In a blog post yesterday, Anthropic said that AI tools could help modernize systems based on COBOL code. Anthropic is the company behind Claude, one of the leading AI tech platforms, and said in its post that the system’s coding tools could be used to automate the experimentation, analysis, and implementation phases associated with modernizing COBOL-based systems. The blog post also pointed out that COBOL is taught at only a handful of universities and that the pool of engineers capable of reading the code is becoming increasingly difficult.

In response, IBM said that translating COBOL was the easy part and that the real work is “data architecture redesign, runtime replacement, transaction processing integrity, and hardware-accelerated performance built over decades of tight software and hardware coupling.” The company’s spokesperson also noted that new AI tools are emerging every week and pointed to the launch of its watsonX Code Assistant for its Z mainframe two years ago as an example of its own initiatives to use artificial intelligence to modernize code.

Is IBM stock a buy after its big pullback?

While IBM’s cloud software businesses have been at the heart of its recent growth, mainframe sales still account for a sizable portion of revenue – and investors are worried that AI tools could cut into the business. Mainframe sales accounted for 23% of the company’s overall revenue last year, and mainframe-related software accounted for roughly 29% of overall software sales.

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NYSE: IBM

International Business Machines

Today’s Change

(2.60%) $5.79

Current Price

$229.15

Key Data Points

Market Cap

$209B

Day’s Range

$223.65 - $236.54

52wk Range

$214.50 - $324.90

Volume

629K

Avg Vol

4.8M

Gross Margin

58.06%

Dividend Yield

3.01%

While IBM stock has seen a big valuation pullback this year, the stock is still up 76% over the last three years. Shares are currently valued at roughly 18.5 times this year’s expected earnings. The company also pays a dividend yielding roughly 2.9%, but sales and earnings growth have been proceeding at more moderate paces compared to other tech companies with exposure to AI trends.

IBM’s revenue hit $67.5 billion last year, up 8% annually – or 6% on a currency-adjusted basis. Meanwhile, the company is guiding for currency-adjusted revenue growth of roughly 5%. Free cash flow for the year is projected to come in at roughly $15.7 billion – up approximately 7% annually.

The impact of Claude Code and other AI tools on COBOL and IBM’s mainframe business is difficult to estimate at this point, and it’s possible the market has significantly overreacted to the potential threat. The company’s entrenched legacy sales base, reputation for reliability, and internally developed tools could allow it to weather AI-driven modernization shifts.

On the other hand, the risks that new artificial technologies pose to some of the company’s consulting and software businesses and overall growth story can’t be completely discounted. With growth already looking relatively muted compared to other big players in the tech space, I think there are better buys right now.