AI Adoption And Cloud Migration Will Gradually Improve Mission-Critical Infrastructure Services Outlook

Catalysts

About Kyndryl Holdings

Kyndryl Holdings provides mission-critical IT infrastructure services, helping enterprises modernize, secure and manage complex hybrid technology environments.

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

• Although IT modernization needs are intensifying as nearly half of enterprise systems approach end of life, elongated sales cycles for complex scope-expansion and renewal deals risk pushing out conversion of Kyndryl’s growing backlog into realized revenue. This may temper the pace of top line growth and adjusted earnings.
• Despite rapid adoption of cloud and hyperscaler platforms, including strong growth in hyperscaler-related revenues, ongoing removal of low-margin hardware and software content, alongside potential pricing pressure in managed services, may cap upside in reported revenue growth even as margins improve. This could limit expansion in net income.
• While broad customer interest in AI-driven operations and Kyndryl’s agentic AI framework is supporting high-margin signings, enterprises may move more cautiously from pilots to scaled deployments. This could delay monetization of AI projects and slow the anticipated uplift in high single-digit pretax margins.
• Although digital workplace, applications, data and AI practices are posting double-digit constant currency growth, heavier dependence on advisory and consultative work exposes Kyndryl to project timing and utilization risk. This could create volatility in quarterly revenue and constrain near-term margin leverage.
• While infrastructure modernization and cybersecurity concerns are structurally expanding demand for end-to-end mission-critical services, execution risks in integrating tuck-in acquisitions and scaling Kyndryl Bridge efficiently could pressure operating costs. This may limit free cash flow growth toward the targeted more than $1 billion level.

Assumptions

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

• The bearish analysts are assuming Kyndryl Holdings's revenue will grow by 3.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.7% today to 5.3% in 3 years time.
• The bearish analysts expect earnings to reach $877.4 million (and earnings per share of $4.5) by about December 2028, up from $408.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.1 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, down from 15.3x today. This future PE is lower than the current PE for the US IT industry at 29.6x.
• The bearish 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 11.09%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Strong alignment with long-term secular tailwinds such as AI adoption, cloud migration, cybersecurity needs and large-scale infrastructure modernization, combined with Kyndryl Bridge’s automation and agentic AI capabilities, could drive sustained mid single digit or higher revenue growth and structurally higher gross profit. This could lead to a meaningful re-rating of the share price and an increase in earnings.
• The company’s consistent book to bill ratio and gross profit book to bill above 1, alongside a growing backlog of high margin post-spin contracts with projected pretax margins in the high single digits, may translate into compounding margin expansion that materially lifts pretax income and net income beyond current expectations.
• Rapid growth in higher value Kyndryl Consult and hyperscaler-related services, which are already delivering double digit and greater than 50 percent growth respectively, could accelerate the revenue mix shift toward advisory and cloud services. This would support faster top line growth and expanding EBITDA margins.
• Management’s focus on capital returns, including an expanded share repurchase program funded by rising free cash flow and a strong balance sheet with low leverage, may reduce share count and boost earnings per share, increasing investor demand and the company’s valuation multiple.
• Successful execution of tuck-in acquisitions like the European cloud services provider and continued remediation of low margin legacy contracts could enhance Kyndryl’s competitive position in sovereign and hybrid cloud, supporting higher long-term revenue growth and stronger adjusted free cash flow.

Valuation

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

• The assumed bearish price target for Kyndryl Holdings is $28.0, which represents up to two standard deviations below 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 more bearish 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 bearish analyst cohort, you'd need to believe that by 2028, revenues will be $16.5 billion, earnings will come to $877.4 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 11.1%.
  
• Given the current share price of $27.28, the analyst price target of $28.0 is 2.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.