Kyndryl (KD)

IT infrastructure services provider Kyndryl (NYSE:KD) fell short of the markets revenue expectations in Q3 CY2025, with sales falling 1.4% year on year to $3.72 billion. Its non-GAAP profit of $0.38 per share was 6.2% above analysts’ consensus estimates.

Company Overview

Born from IBM's managed infrastructure services business in a 2021 spinoff, Kyndryl (NYSE:KD) is the world's largest IT infrastructure services provider that designs, builds, and manages technology environments for enterprise customers.

IT Services & Consulting companies stand to benefit from increasing enterprise demand for digital transformation, AI-driven automation, and cybersecurity resilience. Many enterprises can't attack these topics alone and need IT services and consulting on everything from technical advice to implementation. Challenges in meeting these needs will include finding talent in specialized and evolving IT fields. While AI and automation can enhance productivity, they also threaten to commoditize certain consulting functions. Another ongoing challenge will be pricing pressures from offshore IT service providers, which have lower labor costs and increasingly equal access to advanced technology like AI.

Kyndryl competes with global IT services providers like Accenture (NYSE: ACN), IBM (NYSE: IBM), DXC Technology (NYSE: DXC), and Infosys (NYSE: INFY), as well as cloud service providers that offer managed infrastructure services.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years.

With $15.01 billion in revenue over the past 12 months, Kyndryl is a behemoth in the business services sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices. However, its scale is a double-edged sword because finding new avenues for growth becomes difficult when you already have a substantial market presence. To accelerate sales, Kyndryl likely needs to optimize its pricing or lean into new offerings and international expansion.

As you can see below, Kyndryl struggled to generate demand over the last five years. Its sales dropped by 4.8% annually, a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. Kyndryl’s annualized revenue declines of 5.6% over the last two years align with its five-year trend, suggesting its demand has consistently shrunk.

This quarter, Kyndryl missed Wall Street’s estimates and reported a rather uninspiring 1.4% year-on-year revenue decline, generating $3.72 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 5.1% over the next 12 months, an improvement versus the last two years. This projection is above the sector average and indicates its newer products and services will fuel better top-line performance.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Although Kyndryl was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 3% over the last five years. Unprofitable business services companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

On the plus side, Kyndryl’s operating margin rose by 13.4 percentage points over the last five years. Still, it will take much more for the company to show consistent profitability.

This quarter, Kyndryl generated an operating margin profit margin of 2.6%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Kyndryl’s full-year EPS flipped from negative to positive over the last two years. This is encouraging and shows it’s at a critical moment in its life.

In Q3, Kyndryl reported adjusted EPS of $0.38, up from $0.01 in the same quarter last year. This print beat analysts’ estimates by 6.2%. Over the next 12 months, Wall Street expects Kyndryl’s full-year EPS of $1.78 to grow 67.2%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Kyndryl broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, an encouraging sign is that Kyndryl’s margin expanded by 8.9 percentage points during that time. We have no doubt shareholders would like to continue seeing its cash conversion rise as it gives the company more optionality.

Kyndryl broke even from a free cash flow perspective in Q3. This cash profitability was in line with the comparable period last year and above its five-year average.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Kyndryl’s five-year average ROIC was negative 13.6%, meaning management lost money while trying to expand the business. Its returns were among the worst in the business services sector.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Kyndryl’s ROIC has increased. This is a good sign, but we recognize its lack of profitable growth during the COVID era was the primary reason for the change.

Kyndryl reported $1.33 billion of cash and $3.13 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.69 billion of EBITDA over the last 12 months, we view Kyndryl’s 0.7× net-debt-to-EBITDA ratio as safe. We also see its $46 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Kyndryl beat analysts’ EPS expectations this quarter. On the other hand, its revenue missed. Overall, this was a mixed quarter. The stock traded up 5.8% to $29 immediately following the results.

Updated: December 3, 2025 at 11:01 PM EST

When considering an investment in Kyndryl, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Kyndryl isn’t a terrible business, but it isn’t one of our picks. To kick things off, its revenue has declined over the last five years. And while its scale makes it a trusted partner with negotiating leverage, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its operating margins reveal poor profitability compared to other business services companies.

Kyndryl’s P/E ratio based on the next 12 months is 7.7x. While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $37.60 on the company (compared to the current share price of $26.04).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.