Is Kyndryl worth owning in 2024?

How far were you from the Big Blue tree? kindergarden (K.D. 1.66%) Apple fall?

Previously known as IBM‘S (IBM -1.06%) Its IT infrastructure services division, Kyndryl, spun off into an independent public company in 2021. As a separate business, Kyndryl is the world’s largest provider of support for business-grade and mission-critical technology systems.

Kyndryl got off to a rough start in life. The stock was worth $6.4 billion on its first day, also known as November 3, 2021. The stock chart fell immediately, dropping significantly from $28.50 to $8.23 per share in less than a year.

But it’s not all doom and gloom. Kyndryl’s stock has made a strong recovery from a brutal initial decline, rising 87% in 2023. The stock is still 32% below its split date closing price, and with a market capitalization of $4.4 billion, there is probably still room for further upside.

So are IT services stocks poised to keep rising this year? Let’s take a closer look.

Why Kyndryl’s stock price fell in the first place

First and foremost, many investors viewed Kyndryl as an albatross for IBM. That means growth prospects are limited, margins are low and best ignored and forgotten. IBM itself is also focused on high-growth opportunities such as artificial intelligence (AI), data security, and hybrid cloud computing.

Big Blue had a habit of “normalizing” its financial reports in the quarters before Kyndryl was spun off, showing investors how much faster the rest of the business would have grown without its IT services foundation. The powerful but uninteresting IT services business had no place in IBM’s reformed strategy.

So it’s not surprising to see the value of new stocks fall in the beginning. Moreover, I am talking about the almost exact beginning of the global inflation panic that has weighed on the entire technology sector in 2022. From this perspective, the timing of Kyndryl’s birth was very unfortunate.

But wait a minute. There’s more. Kyndryl’s top line as a separate company declined year-over-year in each of its eight earnings reports. The company’s earnings have almost always been negative, and Kyndryl is regularly burning cash. Kyndryl’s downward trend makes perfect sense with dark clouds hovering overhead.

Image source: Getty Images.

What has changed?

The mood surrounding Kyndryl’s modest growth prospects has changed. Three of last year’s four earnings reports sparked sudden surges in stock prices the next day, even though the actual results weren’t always impressive. For example, the August 2023 first quarter update overall fell short of analyst consensus targets, according to data from Benzinga. However, the next day the stock price rose 18.6%.

As you can see, Kyndryl’s investors have come to terms with the current challenges and are starting to look forward to better days ahead.

Management continues to raise its annual estimates with each quarterly report. As a result, mainstream analysts have lowered their full-year net loss expectations by 16% over the past three months and by 30% over the past six months.

On the November earnings call, CEO Martin Schroeter highlighted how partnerships with so-called hyperscaler cloud computing platforms are reshaping Kyndryl’s long-term strategy.

“Selectively migrating specific workloads to the cloud is a prime example of how large organizations are looking to modernize, transform and increase efficiency,” Schroeter said. The CEO added:

Our hyperscaler-related contracts have increased more than 35% year-to-date and our hyperscaler-related revenue has grown even more. And some of our biggest new logo signings have been for customers looking to leverage our hyperscale alliances and cloud migration expertise.

IBM is a hyperscaler with a wide range of cloud computing services, so its sector leaders include: Amazon (AMZN 0.46%) and microsoft (MSFT -0.05%) They may be less interested in working with a competitor’s IT services.

Where will Kyndryl go next?

Kyndryl appears to have found a promising niche in the ever-changing IT industry. Management’s long-term guidance calls for adjusted earnings to turn positive in fiscal 2025. On the other hand, the stock price is absolutely cheap at 0.3 times the trailing sales.

This is certainly a different take on today’s AI-inspired technology investment opportunities. While you can’t directly tap into IBM’s high-growth ambitions, buying Kyndryl stock today at a discount could lead to strong returns over time. There is nothing wrong with slow, predictable growth as long as the general trend is upward. And Kyndryl is starting to fit that description these days.