Kyndryl Holdings (KD) is perceived as an expensive stock, trading at 61 times GAAP earnings, with negative free cash flows reported over the past four quarters. This high price-to-earnings (P/E) ratio has led many value investors to shy away from Kyndryl’s recent financial practices.
Kyndryl’s separation from its former parent company IBM (IBM) left it with numerous low-margin client contracts, impacting its profit margin negatively. The company has been restructuring these contracts, aiming to increase the profitability of approximately half of its inherited long-term revenue streams during its first three years as an independent entity.
Kyndryl intends to renegotiate 90% of its deals by the fiscal year 2028. The company projects its free cash flow to reach $300 million in 2025, potentially tripling over the following three years. During this period, its declining top-line revenue is expected to stabilize with mid-single-digit annual growth. This transformation positions Kyndryl as a potentially shareholder-friendly entity, capable of executing generous stock buybacks and possibly issuing dividends.
Kyndryl’s management has outlined these financial goals by using the phrase “triple, double, single,” as depicted in Kyndryl Holdings’ Q3 2025 earnings presentation. This strategy involves advanced financial restructuring, a familiar area for CEO Martin Schroeter, who spent 13 years in high-level financial roles at IBM. While stepping away from unprofitable service contracts initially resulted in reduced sales, it is intended to improve profit margins and generate direct profit over time.
When considering the company’s long-term profit growth, Kyndryl’s stock may no longer appear costly. If the company achieves its goal of $1 billion in free cash flow by 2028 without any change in the stock price, it would be valued at approximately eight times the projected 2028 cash flows. Even if the stock price were to double, it could still appear favorably priced compared to its competitors in IT management services, such as Accenture (ACN) and WiPro (WIT).
Thus, Kyndryl’s stock may not be as expensive as it initially seems. The company’s fundamental restructuring could set up investors for robust long-term returns.
