How far from the Big Blue tree did the Kyndryl (NYSE: KD) apple fall?
Formerly known as IBM‘s (NYSE: IBM) IT infrastructure-services division, Kyndryl spun out as an independent public company in 2021. As a separate business, Kyndryl is the world’s largest provider of support for business-grade and mission-critical technology systems.
Kyndryl got off to a rocky start in life. The stock was worth $6.4 billion on Day One, also known as Nov. 3, 2021. Its stock chart immediately dipped, falling all the way from $28.50 to $8.23 per share in less than a year. But it’s not all doom and gloom. Kyndryl’s stock has mounted a robust comeback from that brutal initial drop, posting an 87% gain in 2023. The stock still sits 32% below the spin-off date’s closing price with a market capitalization of $4.4 billion, perhaps leaving room for further gains. So is the IT services stock poised to continue the climb this year? Let’s take a closer look.
The Abrupt Fall of Kyndryl’s Stock
First and foremost, many investors saw Kyndryl as an albatross for IBM — a low-margin dead weight with limited growth prospects, best shrugged off and forgotten. IBM itself is focusing on high-growth opportunities such as artificial intelligence (AI), data security, and hybrid cloud computing. Hence, it wasn’t surprising to see the new stock losing value in the early days. Moreover, the exact start of the global-inflation panic weighed on the entire technology sector in 2022. The timing of Kyndryl’s creation was highly unfortunate from this perspective. Kyndryl’s top-line sales have declined on a year-over-year basis in each one of its eight earnings reports as a separate company. The company’s earnings have almost always been negative, and Kyndryl is burning cash on a regular basis. Kyndryl’s downtrend makes perfect sense with these dark clouds looming overhead.
The Changing Landscape for Kyndryl
The mood around Kyndryl’s modest growth prospects has changed. Three of last year’s four earnings reports inspired sudden stock jumps the next day even though the actual results didn’t always impress. For example, the first-quarter update in August 2023 fell short of the analyst consensus targets across the board, according to Benzinga’s data. Yet, the stock price rose by 18.6% the next day. Management keeps raising their full-year estimates in every quarterly report. As a result, your average analyst has lowered their full-year net-loss expectations by 16% over the last three months and 30% in six months. In November’s earnings call, CEO Martin Schroeter highlighted how alliances with so-called hyperscaler cloud-computing platforms are reshaping Kyndryl’s long-term strategy. Since IBM is a hyperscaler with a broad range of cloud-computing services, sector leaders such as Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT) might have been less interested in partnering with a rival’s IT services.
Future Prospects for Kyndryl
Kyndryl appears to have found a promising niche in the ever-changing IT industry. Adjusted earnings should turn positive in fiscal year 2025, according to management’s long-term guidance. Meanwhile, the stock is an absolute bargain at 0.3 times trailing sales. This is certainly a different spin on the opportunity of today’s AI-inspired technology investments. You’re not getting direct access to IBM’s high-growth ambitions, but buying Kyndryl shares at today’s bargain-bin price could result in strong returns over time. There’s nothing wrong with slow and predictable growth as long as the general trend points upward — and Kyndryl is starting to match that description nowadays.