Hook & thesis
Kyndryl completed the worst of its operational reset in 2023-2024. The last two quarters (quarter ended 06/30/2025 and 09/30/2025) show positive operating income and consistent net profits, positive operating cash flow and only small quarterly free cash flow deficits. That combination - meaningful revenue scale (~$3.7B per quarter), improving margins, and a depressed enterprise valuation - argues for a tactical long. I think the hard reset is behind Kyndryl and the risk/reward favors entry now with a clearly defined stop and staged upside targets.
Why the market should care
Kyndryl is a large IT infrastructure and managed services company that helps enterprises modernize on-prem and cloud estates. The business is fundamentally about recurring services, large contract relationships and scale economics. The market cares because Kyndryl sits squarely in secular themes - cloud migration, AI-enablement of legacy infrastructure, and cybersecurity - but trades at a valuation that assumes slow or absent margin recovery. If management can stabilize margins and convert modest operating income into consistent free cash flow, the valuation gap will close quickly.
What the company looks like today (numbers you can trust)
In the quarter ended 09/30/2025 (filed 11/05/2025) Kyndryl reported:
- Revenue: $3,721,000,000.
- Gross profit: $801,000,000 - implied gross margin ~21.5%.
- Operating income: $98,000,000 - operating margin ~2.6%.
- Net income attributable to parent: $68,000,000 - net margin ~1.8%.
- Diluted EPS for the quarter: $0.29 (diluted average shares ~235.9M).
- Net cash flow from operating activities: $146,000,000; investing -$122,000,000, producing modest positive cash flow after investing for the quarter (~$24M).
- Assets: $11.244B; Liabilities: $9.904B; Equity attributable to parent: $1.227B.
Those figures matter because they show a company that (1) still generates scale revenue in the high single-digit billions each quarter, (2) is no longer bleeding relentlessly at the operating level, and (3) is beginning to convert revenue into positive quarterly cash flow after investing.
Valuation framing - simple, transparent math
Market snapshot: the last quoted price here is $24.88. The company does not provide a single explicit market cap in the filings, but using diluted average shares of 235.9M (most recent quarter) gives a reasonable live-market estimate: 24.88 * 235.9M = ~ $5.9 billion market cap (rounded).
If you annualize the most recent quarter's revenue (Q2 ended 09/30/2025) of $3.721B, you get an approximate trailing-12-month revenue run-rate near $14.9B. Using that run-rate the market-cap-to-sales ratio is ~0.4x - very cheap for an infrastructure/managed-services company with positive operating income. Quarterly diluted EPS of $0.29 annualized implies EPS of ~ $1.16 and an indicative P/E near ~21.5x today. That P/E is not asset-light SaaS cheap - but given Kyndryl's recent track record of losses through 2023 it reflects a market that wants proof-of-sustained profitability. My view: the market is discounting continued execution risk more than it should given the last two quarters of operating gains and positive operating cash flow.
Quick valuation note and caveat: these are quick, transparent multiples based on quarter-to-annualized math and diluted shares as reported in the most recent quarter. If shares outstanding or one-off items materially change, multiples re-rate. Use the numbers above as a starting point, not gospel.
Why I think the reset is over
- Trend to profitability: Q1 (ended 06/30/2025) reported net income of $56M and Q2 (ended 09/30/2025) reported net income of $68M. That is two consecutive quarters of positive net income after multiple quarters of losses in earlier years.
- Cash flow stability: operating cash flow in the most recent quarter was $146M, and after investing (-$122M) the quarter produced modest positive cash flow. That is a meaningful structural improvement versus the heavy cash burn seen during the reset years.
- Margins are improving off a low base: a gross margin of about 21.5% with operating margin of ~2.6% suggests there is room for incremental operating leverage as revenue stabilizes and SG&A/other operating expenses are controlled.
Catalysts (what can drive the stock higher)
- Continued margin expansion: incremental improvement in operating margin from cost discipline or higher-value managed/cloud services would directly lift EPS and cash flow.
- Large contract renewals / new strategic wins: any multi-year managed services or cloud transformation wins accelerate recurring revenue visibility and improve investor confidence.
- AI/Cloud tailwinds: adoption of AI infrastructure by enterprises tends to favor vendors who can manage hybrid environments. Positive newsflow that Kyndryl is winning AI-related engagements should re-rate the business.
- Balance-sheet improvement / capital returns: consistent positive free cash flow could lead to modest buybacks or dividends and a re-rating if leverage trends down.
Actionable trade idea
This is a tactical long (trade direction: long). Execute with size discipline and a stop that respects the company’s leverage and cyclical revenue profile.
- Entry: 1) Primary entry 24.00 - 25.50. If you prefer a lower-risk entry, scale in at 23.00 - 24.00. The recent trade prints and the $24.88 reference price make 24.00-25.50 a pragmatic band to start a position.
- Initial stop: 20.00 (about -20% from the current price). Keep the stop firm: Kyndryl is levered and a break below $20 would likely indicate margin degradation or renewed client stress.
- Targets:
- Target 1 (near-term): $30.00 - a ~20% upside. There is technical and psychological resistance around $30 given prior trading history.
- Target 2 (medium-term): $36.00 - a ~45% upside from here, reflecting multiple expansion as proof of stable earnings accrues.
- Target 3 (extended): $45.00 - longer-horizon target if Kyndryl proves sustainable FCF and shows sustained margin improvement and some capital return activity.
- Position sizing & risk management: keep any single trade allocation modest (suggest 2-5% of portfolio) given execution risk and leverage. Scale into winners and tighten stops after each target partial-fill.
Risks and counterarguments
At least four key risks could derail the thesis:
- Client concentration and contract risk: large managed-services contracts can be lumpy. If a big client renegotiates downward or doesn’t renew, revenue and margin could quickly deteriorate.
- Low-margin services business: the industry is price-competitive. Kyndryl’s operating margin in the most recent quarter was only ~2.6%. Small negative swings in utilization, wage inflation, or offshore delivery assumptions can wipe out profitability.
- Leverage and balance-sheet constraints: noncurrent liabilities are sizable (~$5.7B recent quarter) relative to equity. The company isn’t asset-light and remains exposed to interest/covenant and refinancing risk should credit conditions tighten.
- One-off accounting or FX effects: recent positive quarters include line items (deferred taxes, exchange gains/losses) that can swing quarters. If underlying operating improvements are less than they appear due to one-offs, the stock could reprice lower.
- Macro/IT spending risk: enterprise IT projects can be deferred in weaker macro cycles; a slowdown would hit managed services revenue growth and new contract starts.
Counterargument (what skeptics will say)
Skeptics are right to point out that the company's recent profitability run is young and could be fragile. Much of the market's prior distrust came from multi-quarter losses and cash volatility; two quarters of profit do not erase structural concerns. A counterargument that would temper my bullishness is the reappearance of sequential revenue declines, or evidence that recent profits are driven by discrete accounting items rather than sustainable operational improvement.
What would change my mind
I will reassess the bullish stance if any of the following occur:
- Two consecutive quarters of declining revenue or contracting gross margin (measured on a quarter-over-quarter basis).
- A material negative change in the balance sheet (for example, a large new debt raise at onerous terms or covenant breaches).
- Earnings that rely consistently on non-recurring items (e.g., large FX or tax adjustments) rather than operating income and free cash flow.
Conclusion
Kyndryl today looks like a classic 'reset completed, execution required' security. It has scale revenue (~$3.7B quarterly), recent operating gains (two consecutive profitable quarters), and improving cash flow while trading at a low P/S and a reasonable annualized P/E given the progress. That combination creates an asymmetric risk/reward for a controlled long position. Use the entry band, firm stop at $20, and layer out into $30 / $36 / $45 targets as the company proves sustained margin and cash-flow improvement.
Disclosure: This is a trade idea, not personalized investment advice. Always size positions to your risk tolerance and verify live market data before trading.