Is Kyndryl (KD) a Turnaround Story Worth Buying Into?

Kyndryl (KD), the IT services spin-off of IBM, has long been a polarizing name in the market. For years, it struggled with declining revenue and margin pressures, but recent developments suggest a potential inflection point. As the company navigates a strategic transformation, investors are asking: Is Kyndryl a turnaround story worth buying into? The answer hinges on its ability to reverse revenue trends, capitalize on undervaluation, and execute its ambitious digital transformation strategy.

Financial Performance: A Tale of Two Metrics

Kyndryl's Q3 FY2025 results underscored this duality. Revenue fell 5% year-over-year to $3.74 billion, reflecting ongoing challenges in its core legacy infrastructure business according to the earnings statement. However, the company outperformed expectations on the bottom line: non-GAAP EPS of $0.38 beat forecasts by 6.2%, and adjusted EBITDA of $641 million exceeded estimates by 3.7%. This divergence highlights Kyndryl's pivot from volume-driven growth to margin-focused optimization.

The Q4 FY2025 report reinforced this trend. Revenue rebounded with a 1.3% year-over-year increase in constant currency to $3.8 billion, while adjusted pretax income surged 510% to $185 million and adjusted EBITDA rose 23% to $698 million. These gains were driven by the company's "three-As" strategy-Alliances, Advanced Delivery, and Accounts-which unlocked $1.2 billion in hyperscaler revenue and $900 million in annualized benefits.

Undervaluation: A Compelling Case

Kyndryl's valuation metrics suggest it is trading well below intrinsic value. A DCF analysis estimates its intrinsic value at $88.37 per share, implying a 67.9% undervaluation relative to its current price. Its forward PE ratio of 22.1x is also significantly below the IT industry average and its historical "fair ratio" of 53.3x. Meanwhile, its enterprise value-to-EBITDA (EV/EBITDA) multiple remains depressed despite FY2025 adjusted EBITDA of $2.5 billion.

This disconnect between fundamentals and valuation is partly due to lingering skepticism about Kyndryl's ability to sustain growth. However, the company's FY2025 results-including $15.1 billion in revenue, $2.5 billion in adjusted EBITDA, and $482 million in adjusted pretax income-demonstrate tangible progress. With $1.8 billion in cash and $4.9 billion in liquidity, Kyndryl also has the financial flexibility to fund its transformation without overreliance on debt according to investor presentations.

Transformation Strategy: Cloud, AI, and Strategic Alliances

The heart of Kyndryl's turnaround lies in its focus on digital transformation. Its expanded partnerships with cloud hyperscalers (e.g., AWS, Microsoft, Google) generated $300 million in Q3 FY2025, and the company now expects hyperscaler revenue to contribute meaningfully to its 2026 outlook. Additionally, Kyndryl Consult-a consulting arm focused on cloud and AI-delivered double-digit growth in Q3 and over the past 12 months according to earnings updates.

The company's AI initiatives, including the Kyndryl Bridge platform, are also gaining traction. These tools aim to automate IT operations and reduce costs, directly supporting margin expansion. For FY2025, Kyndryl reported $18.2 billion in contract signings-a 46% year-over-year increase-indicating strong client demand for its modernized services.

Outlook and Risks

Kyndryl's guidance for FY2026 is ambitious but achievable. It projects adjusted pretax income of at least $725 million, an 18% adjusted EBITDA margin, and $550 million in free cash flow. These figures imply a 52% year-over-year increase in pretax income and a 22% jump in free cash flow, driven by continued hyperscaler growth and AI adoption.

However, risks remain. The company's legacy business continues to shrink, and while hyperscaler partnerships are lucrative, they are not immune to market volatility. Additionally, mixed analyst ratings-such as Wall Street Zen's downgrade to "buy" and Morgan Stanley's "equal weight" designation-reflect uncertainty about Kyndryl's long-term differentiation.

Conclusion: A High-Conviction Bet

Kyndryl's transformation is far from complete, but the evidence suggests it is on the right path. The company has stabilized its margins, diversified into high-growth areas like cloud and AI, and improved its balance sheet. At current valuations, the risk-reward profile appears skewed to the upside, particularly for investors with a 3–5 year horizon.

If Kyndryl can sustain its FY2025 momentum and deliver on its 2026 targets, the market may finally recognize its intrinsic value. For now, it remains a compelling, if underfollowed, opportunity in the IT services sector.