Kyndryl (NYSE: KD) provides and optimizes cloud services for customers, advises on their management or takes over management. Employees also help process corporate data, to use the results to reduce costs and grow the business and improve cybersecurity within the company.
Kyndryl split from IBM in November 2021, to focus on the fast growing cloud computing segment.
About the company and market situation
Kyndryl does not disclose customer data, but, probably, these are companies, who work in traditional sectors of the economy, where their IT departments are not developed and there is no narrow technological specialization. This is indirectly confirmed by revenue by sector:
- Financial companies - 47%.
- Distributor - 16%.
- Telecoms - 13%.
- Industry - 13%.
- State enterprises - 11%.
For the last 12 months Kyndryl earned 19.03 billion dollars. Management forecasts revenue of $18.5-18.7 billion for 2021, and in 2022 - about 13 billion dollars on the basis of already signed contracts, excluding new. The drop in revenue is due to, that some clients have suspended work on new projects, while the company was splitting from IBM.
The company has received negative operating cash flow of $ 0.4 billion in the last 12 Months. These losses are associated with a cost of $0.5 billion, which the company has incurred due to the separation: had to pay severance pay, buy equipment and other.
Kyndryl borrowed, to pay off IBM at a branch, but the next repayment is scheduled for 2024. The company shouldn't have any problems with debts.: the interest rate on loans is small 2-4% per annum, there are 2 billion dollars in the accounts, as well as a $3 billion credit line for emergencies.
Company revenue by regions, billion dollars
| 9м2020 | 9м2021 | The change | |
|---|---|---|---|
| Of America | 5,55 | 5,33 | −3,9% |
| Europe, Central Asia and Africa | 5,39 | 5,37 | −0,4% |
| Japan | 2,26 | 2,24 | −1% |
| Asian-Pacific area | 1,22 | 1,16 | −5% |
| Total | 14,43 | 14,10 | −2,6% |
Debt repayment schedule of the company, billion dollars
| 2024 | 0,5 |
| 2026 | 0,7 |
| 2028 | 0,5 |
| 2031 | 0,65 |
| 2041 | 0,55 |
0,5
Why did stocks fall
Since the start of trading, Kyndryl shares have dropped by 42%: from 30.5 to 18,3 $ per share. One possible explanation: the owners of IBM shares received when the Kyndryl share was allocated, That, probably, they didn't need.
IBM is a large company with a trading turnover of several hundred million dollars and a capitalization of 113 billion dollars., which consistently pays dividends. Kyndryl is a small company with a capitalization of 4 billion, which is not going to pay dividends in the foreseeable future and whose prospects are not fully clear due to a small degree of information disclosure and business transformation.
IBM itself has 19,9% in Kyndryl promotions, which she is going to sell, which also does not stimulate the growth of the share price.
Positive moments
Expanded opportunities. As a division of IBM, Kyndryl was unable to partner with certain competitors. Now there is no such limitation. Therefore, the management considers, that the very fact of secession increased the addressable market in 1,7 times - up to 415 billion dollars. The company has already signed partnership agreements with Microsoft, Google Cloud и Raytheon Technologies.
Promising markets. Management believes, what markets, for which the company operates, will grow by 7% annually, taking into account compound interest and will reach $ 510 billion in 2024.
CCS Insight interviewed CIOs in 700 US and European companies across a variety of industries. On average, companies plan to increase spending on cloud services and cybersecurity. At the same time, financial companies and state enterprises have experienced the greatest need., which account for 58% Kyndryl revenue.
For digital transformation, companies will either need to hire highly specialized employees, or use the services of consultants. Kyndryl's management believes, that the main problem of potential clients will be a lack of knowledge, to transfer processes in the cloud yourself.
Insiders in a low price. 30 November 2021, three Kyndryl managers at once bought the company's shares for about 16.7-17.2 $ for pike. According to research, the future return of a portfolio of similar stocks, under appropriate circumstances, is higher, than the return of the market and a portfolio of stocks with single insider transactions.
Nejat Seyhun conducted a study on data from 1978 to 1993, to analyze the future performance of stocks of companies, which included insider trading, in conjunction with cartoons. He divided stocks into five groups according to the "book value to market capitalization" multiplier. (book value / market capitalization).
On 16 December 2021, the value of the Kyndryl multiplier was 1,32 — stock falls into the fourth group. Shares from the fourth group, in which top managers bought more than 1000 shares of the company, showed profitability on 6,3% higher than the index of all stocks in the US market.
Although the research is pretty old, general trends have not changed, insider trading is a significant positive signal for future stock returns.
Insider trading in Kyndryl shares
| Purchase price | Volume | Share of potential earnings for 2021 year | |
|---|---|---|---|
| CFO | 16,73 $ | 248 371 $ | 3% |
| Group president | 17,17 $ | 500 637 $ | 5% |
| General manager | 17,10 $ | 996 685 $ | 7% |
Controversial points
But what turns! The company has large revenues of $ 19 billion and customer relationships last on average 10 years and more. But over the past few years, Kyndryl's revenue has been steadily falling., and management itself believes, that revenue will start to grow only from 2025.
Even worse, that the company has a low gross margin, which also falls steadily. Gross margin is the difference between revenue and cost, divided by revenue. This indicator takes into account only the costs, incurred by the company when selling a specific product or service, and do not take into account a number of other expenses. At the same time, the second largest segment "Europe", Middle East and Africa" negative gross margin. I.e, in fact, the company sells its services at a loss without taking into account a bunch of business expenses.
Maybe, it's a heavy legacy of IBM, which tried to capture the market with the help of dumping. And now how a separate company Kyndryl will extricate itself from the situation. After some time, the company's management will be able to convert freedom into a reduction in the cost of purchasing and managing servers., previously acquired primarily from IBM divisions.
Company gross margin
| 9м2020 | 9м2021 | The change | |
|---|---|---|---|
| America | 15,2% | 15,4% | 1,3% |
| Europe, Middle East and Africa | 0,9% | −1,4% | Otric. |
| Japan | 20,3% | 20,3% | 0,0% |
| Asian-Pacific area | 16,2% | 15,0% | −7,4% |
| Total gross margin | 10,7% | 9,7% | −9,3% |
What's next
At the moment the situation is as follows: revenue falls, margin decreases, but there are prospects - the potential market should grow in 1,7 Times, and the revenue will start to grow later 3 of the year. But future prospects, not here and now. At the same time, shares are bought by insiders, followed by news with the conclusion of various promising partnerships.
To date, it is impossible to consider Kyndryl shares as a strong investment idea., but as speculation - you can, if you have a budget allocated for such experiments.
