Alliances With Microsoft, AWS And Google Will Drive IT Modernization

Key Takeaways

• Strategic alliances and acquisitions enhance modernization efforts, driving revenue growth and positively impacting earnings through an expanded service portfolio.
  
• The share repurchase program reflects confidence in financial stability and growth, potentially boosting earnings per share.
  
• Currency volatility, execution risks, exiting low-margin contracts, rising IBM software costs, and macroeconomic challenges threaten Kyndryl's financial performance and revenue growth.

Catalysts

Operates as a technology services company and IT infrastructure services provider worldwide.

• Kyndryl is experiencing double-digit revenue growth in Kyndryl Consult, driven by increased demand for modernization, cloud, security, and AI services, which is expected to boost revenue and margins.
  
• The company's strategic focus on hyperscaler alliances has led to revenue surpassing $300 million in the quarter, indicating a strong potential for future revenue growth as part of a nearly $1 billion full-year target.
  
• The adoption of Kyndryl Bridge, with its AI-enabled operating platform, is anticipated to enhance automation and efficiency, leading to improved net margins.
  
• Kyndryl's successful expansion in key markets through the Skytap acquisition and alliances with Microsoft Azure, AWS, and Google, supports their modernization efforts, which is expected to impact earnings positively due to an expanded service portfolio.
  
• The ongoing share repurchase program underscores management’s confidence in the company's financial stability and future growth prospects, which could positively affect earnings per share (EPS).

Kyndryl Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kyndryl Holdings's revenue will decrease by 1.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.9% today to 5.4% in 3 years time.
• Analysts expect earnings to reach $844.0 million (and earnings per share of $4.03) by about May 2028, up from $138.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.0x on those 2028 earnings, down from 55.0x today. This future PE is lower than the current PE for the US IT industry at 31.0x.
• Analysts expect the number of shares outstanding to grow by 0.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.39%, as per the Simply Wall St company report.

Kyndryl Holdings Future Earnings Per Share Growth

Risks

• Kyndryl's revenues were affected by currency movements, which may continue to create volatility and uncertainty in reported financial performance, impacting potential revenue growth.
  
• There is significant competition in delivering complex IT modernization services, and while Kyndryl has made progress, execution risks remain if they cannot maintain or grow market share, impacting future earnings.
  
• The company faces ongoing challenges related to exiting low-margin revenue streams, and if the balance between shedding and gaining higher-margin contracts is not managed effectively, this could dampen revenue and margin growth.
  
• The ongoing increases in IBM software costs present a headwind to profitability, as Kyndryl has a contractual obligation that increases costs by $200 million annually, impacting net margins.
  
• The macroeconomic impacts of tariffs and regulatory challenges can elongate timelines for contract execution, which may delay revenue recognition and impact revenue growth and cash flow.

Valuation

• The analysts have a consensus price target of $43.148 for Kyndryl Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $15.6 billion, earnings will come to $844.0 million, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 9.4%.
• Given the current share price of $32.64, the analyst price target of $43.15 is 24.4% 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.