AI And Cloud Modernization Will Drive Strong Long Term Upside Potential

Catalysts

About Kyndryl Holdings

Kyndryl Holdings provides mission-critical IT infrastructure services that modernize and manage complex hybrid technology environments for large enterprises.

What are the underlying business or industry changes driving this perspective?

• Accelerating customer demand for IT modernization and remediation of aging tech debt, including mainframe and hybrid estates, positions Kyndryl to convert its double-digit Kyndryl Consult growth into sustained revenue expansion and higher adjusted pretax income.
• Rapid growth in AI related engagements, including its agentic AI framework and AI enabled delivery on Kyndryl Bridge, should deepen wallet share with existing customers and support mix shift to higher value services that expand gross margins and net margins.
• Surging enterprise cloud adoption and hyperscaler partnerships, with hyperscaler related revenues already growing well above initial targets, create a long runway for recurring managed services that drive mid single digit revenue growth and improving earnings power.
• Structural cybersecurity and regulatory pressures, particularly around sensitive and sovereign workloads, increase reliance on Kyndryl’s mission-critical infrastructure expertise and new private and sovereign cloud capabilities, supporting premium pricing, resilient revenues and stronger pretax margins.
• Consistently high margin post spin signings and a gross profit book to bill above 1 indicate that the growing backlog is richer in profit than current P&L, setting up multi year expansion in adjusted EBITDA margins and faster growth in earnings and free cash flow than in revenue.

Assumptions

This narrative explores a more optimistic perspective on Kyndryl Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Kyndryl Holdings's revenue will grow by 5.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.7% today to 6.4% in 3 years time.
• The bullish analysts expect earnings to reach $1.1 billion (and earnings per share of $5.29) by about December 2028, up from $408.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $867.7 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 14.5x on those 2028 earnings, down from 15.2x today. This future PE is lower than the current PE for the US IT industry at 30.0x.
• The bullish analysts expect the number of shares outstanding to decline by 1.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.07%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Despite a strong pipeline, Kyndryl has already reported quarterly revenue around $100 million below internal targets and is relying on a back-end loaded acceleration in the second half of fiscal 2026 and into 2028. If complex renewals and scope expansion deals continue to slip or take longer to convert due to cautious enterprise decision-making, revenue growth could remain stuck at low single digits rather than mid single digits, limiting the ability to scale earnings and free cash flow.
• The long-term strategy of removing low-margin hardware and software content has been a roughly 4-point drag on constant currency revenue growth. If the margin uplift from higher value services, Kyndryl Consult and hyperscaler work fails to fully offset this structural headwind, or if demand for modernization slows with macro uncertainty, total revenue may stagnate while fixed cost absorption pressures adjusted EBITDA margins and pretax margins.
• Kyndryl is heavily exposed to secular IT modernization, cloud migration and AI adoption trends that require large, complex projects and often displace incumbents or insourced work. In a downturn or prolonged period of corporate budget caution, enterprises may defer or scale back these transformations, which would compress the expected growth in Kyndryl Consult, hyperscaler related revenue and agentic AI work and weigh on revenue and earnings progress.
• The business model is becoming more concentrated in higher value, mission-critical services delivered via platforms like Kyndryl Bridge and in select verticals such as retail, travel and TMT. Any service outage, security incident, regulatory setback in sovereign or private cloud, or deterioration in customer satisfaction could damage Kyndryl’s reputation as a gold standard provider, leading to lost renewals, weaker pricing on new signings and downward pressure on both revenue and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Kyndryl Holdings is $55.0, which represents up to two standard deviations above the consensus price target of $37.6. This valuation is based on what can be assumed as the expectations of Kyndryl Holdings's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $55.0, and the most bearish reporting a price target of just $28.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $17.6 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 11.1%.
  
• Given the current share price of $27.17, the analyst price target of $55.0 is 50.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.