Kyndryl’s stock price has taken a beating over the past six months, shedding 56.9% of its value and falling to $11.08 per share. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Kyndryl, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Kyndryl Not Exciting?
Despite the more favorable entry price, we don't have much confidence in Kyndryl. Here are three reasons you should be careful with KD and a stock we'd rather own.
1. Revenue Spiraling Downwards
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. Over the last five years, Kyndryl’s demand was weak and its revenue declined by 4.8% per year. This wasn’t a great result and is a sign of lacking business quality.
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Kyndryl’s revenue to stall. Although this projection suggests its newer products and services will catalyze better top-line performance, it is still below average for the sector.
3. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? 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 13.8%, meaning management lost money while trying to expand the business. Its returns were among the worst in the business services sector.
Final Judgment
Kyndryl’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 6× forward P/E (or $11.08 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our top software and edge computing picks.
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