Why Kyndryl (KD) Underperformed Despite Strong Earnings Growth Forecasts

The stock of Kyndryl Holdings, Inc. (KD) has defied expectations in 2025, underperforming despite robust earnings growth and a strategic pivot toward high-margin AI and security services. While the company reported $15.1 billion in revenue for fiscal 2025 and an adjusted pretax income of $482 million, its share price has languished near $26.59 as of December 2025-far below analyst estimates of fair value and sector peers' valuations. This disconnect between fundamentals and market performance can be attributed to broader shifts in the Technology Services sector, including valuation skepticism, macroeconomic anxieties, and a reallocation of capital toward defensive assets.

Kyndryl's Financial Resilience Amid Structural Challenges

Kyndryl's Q4 2024 results highlighted a turnaround in profitability, with adjusted pretax income of $30 million and adjusted EBITDA of $698 million for the full fiscal year 2025. The company's strategic focus on shedding low-margin contracts and expanding hyperscaler alliances-driving $1.2 billion in cloud-related revenue-has improved margins and operational efficiency. Analysts at Simply Wall St. argue that KD is undervalued, with a fair value estimate of $37.60 per share compared to its closing price of $26.95 according to recent analysis. However, structural challenges persist: legacy contract transitions and large account management issues continue to weigh on growth, creating uncertainty for investors as noted in recent reports.

Sector-Wide Valuation Skepticism and Sentiment Shifts

The Technology Services sector entered Q4 2025 amid a wave of skepticism. Short interest in subsectors like North America Software & Services and Technology Hardware & Equipment hit year-to-date highs, signaling institutional caution. This shift was catalyzed by Palantir's (PLTR) Q3 earnings report, which triggered a 15% sell-off in AI-linked stocks and erased $820 billion in market value within a week. Kyndryl, with its forward P/E ratio of 12.68-well below the sector average of 21.67-was caught in this broader selloff, despite its own earnings outperforming expectations.

Macroeconomic headwinds further amplified the sell-off. A government shutdown, weak consumer sentiment (University of Michigan index at 50.3), and warnings from Wall Street CEOs about a potential market correction fueled a defensive investor stance. By December 2025, capital had shifted toward healthcare and energy sectors, reversing the traditional "Santa Claus Rally" and marking what analysts call the "Great Rebalancing". Kyndryl's exposure to IT services-a sector historically tied to speculative growth-made it particularly vulnerable to this reallocation.