What a brutal six months it’s been for Kyndryl. The stock has dropped 58% and now trades at $12.83, rattling many shareholders. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Kyndryl, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Kyndryl Not Exciting?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons we avoid 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. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Kyndryl struggled to consistently generate demand over the last five years as its sales dropped at a 4.8% annual rate. This wasn’t a great result and signals it’s a lower quality business.
2. Breakeven Free Cash Flow Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Kyndryl broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.
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? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Kyndryl’s four-year average ROIC was negative 9%, meaning management lost money while trying to expand the business. Its returns were among the worst in the business services sector.
Final Judgment
Kyndryl isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 6.3× forward P/E (or $12.83 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are superior stocks to buy right now. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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