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.
Image source: Getty Images.
The Initial Plunge: Why Kyndryl’s stock fell in the first place
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.
Big Blue was in the habit of “normalizing” its financial reports in the quarters leading up to Kyndryl’s separation, showing investors how much faster the remaining business would have grown without the IT services anchor. The robust but unexciting IT services business had no place in IBM’s reformed strategy.
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, which weighed on the entire technology sector in 2022, was highly unfortunate from this perspective. The timing of Kyndryl’s creation was less than ideal.
But wait — there’s more. 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.
Rising Above: What’s changed?
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:
Our hyperscaler-related signings are up more than 35% so far this year, and our hyperscaler-related revenues were up even more. And some of our largest new logo signings have been for customers who want to leverage our hyperscale alliances and cloud migration expertise.
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.
The Road Ahead: Where is Kyndryl going next?
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.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Amazon and International Business Machines. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.
