Dean Mitchell Investment Thesis suggests that Kyndryl Holdings, Inc. (NYSE: KD) is facing a challenging future. As a technology services company and the largest provider of IT infrastructure services globally, Kyndryl has a lot of unprofitable contracts with customers. To improve profitability, the company must renegotiate smaller, yet more profitable contracts with certain customers or stop servicing those accounts when they become due.
The bull case for Kyndryl is that it is expected to deliver improved profitability, even as its revenues continue to compress with time. The company has made substantial progress in improving its profitability profile and has a clear strategy in place. With a presence in over 60 countries, Kyndryl helps enterprises adapt to technological changes by designing, building, and managing secure hybrid cloud environments. It offers a wide range of services across various technology domains, including cloud services, core enterprise solutions, data and AI services, and more.
However, the bear case for Kyndryl is that its stock is not cheap enough to support its valuation. While the company has made progress in improving profitability, its stock is priced at around 22 times this year’s pretax profits, despite its declining revenues. Kyndryl is renegotiating contracts with customers who have been used to paying a low figure for its services, and convincing them to pay more in a competitive IT services market may not be an easy task.
There are also risks involved for Kyndryl. Customer retention costs could rise as the company seeks growth, and achieving growth relies on investing in its own infrastructure. Kyndryl’s large amount of non-cash intangible amortization is a concern, as these costs will eventually have to be replaced with better technologies to justify higher prices for the same offering.
In conclusion, Kyndryl’s near-term prospects are uncertain, making it a complex investment choice. While the company has a strategy in place to improve profitability, its declining revenues and the challenges involved in renegotiating contracts and convincing customers to pay more in a competitive market pose risks. Investors must carefully consider the stock’s valuation and the company’s ability to retain existing customers and invest in infrastructure before making an investment decision.