sefa ozel/E+ via Getty Images
Kyndryl Holdings’ (NYSE:KD) stock rose about 2% on Thursday after Oppenheimer initiated coverage with an Outperform rating.
The firm has set a $33 price target on shares of the company, which provides IT infrastructure and cloud services.
Analysts led by Ian Zaffino noted that, with Kyndryl poised to return to top-line growth, meaningfully increase margins, and generate more than $3 of EPS in FY27, the company represents an interesting investment opportunity.
No longer captive to former parent IBM (IBM), Kyndryl has been able to re-price legacy no/low margin contracts, strike deals with major hyperscalers, move its customer to its cost-saving operating platform (Kyndryl Bridge), and grow its Consult business by double digits, the analysts added.
These tailwinds should continue for the foreseeable future, and help transform the company, which was previously viewed as a bad business or loss-leader under IBM, into an interesting GARP (growth at a reasonable price) investment.
Formerly IBM’s IT services business, Kyndryl is the largest IT infrastructure services provider in the world. Cloud revenues have surpassed those of Core Enterprise (34%, versus 32% of total sales), and continue to grow, as more customers trust the company for the transition of their mission-critical operations, Oppenheimer stated.
The analysts added that Kyndryl continues to reprice the no-margin, and low-margin third-party contracts it inherited from IBM, which used the company as a loss-leader to sell its own hardware/ software. At the spin-time, 40% of Kyndryl’s signings had 0% gross margins and the balance had mid-20% gross margins. As of the fourth quarter of ’24,Kyndryl repriced 50% of these contracts, and about two-thirds will be repriced this year.
The company’s recent success has been steered by its strategic framework of three-A’s 1 — Alliances, Advanced Delivery, and Accounts. Here, Kyndryl looks to expand relationships with non-IBM partners, increase automation and reprice contracts. Overall, these initiatives are aimed to deliver $2.4B of annualized pretax profit. The company recently increased its targets for Advanced Delivery/Accounts to $800M/$1B, from $600M/$800M.
Kyndryl has been able to generate solid performance despite other IT and consultancy players highlighting some weakness. The analysts attribute this difference to the company’s focus on mission-critical services and wallet share growth. In addition, Kyndryl services a diverse customer set— such as Financial Services (45% of revenues), TMT (16%), Retail and Travel (16%), Industrials (13%) and Public (11%).
Kyndryl (KD)has a Strong Buy rating at Seeking Alpha’s Quant Rating system, which consistently beats the market. Meanwhile, the Seeking Alpha authors’ (2 authors in total) average rating is Hold and the average Wall Street analysts’ rating is Strong Buy.
