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Any uncertainty can act as a deterrent for investors and reduce their participation in the markets. And as we are on the precipice of April 2, the markets are already turbulent as it is. In this already tenuous situation, the last thing a company wants is a damning report from a short-seller that questions the authenticity of some of its key metrics. Yet, that is exactly what this former IBM (IBM) subsidiary is facing.
About Kyndryl Stock
Founded in 2021 following its spin-off from IBM's infrastructure services division, Kyndryl (KD) is the world's largest IT infrastructure services provider. It designs, builds, manages, and modernizes enterprise IT systems. Kyndryl's service portfolio encompasses cloud services, security and resiliency; network and edge computing; digital workplace solutions; core enterprise and zCloud; and applications, data, and AI. The company's market cap currently stands at $7.3 billion.
Following a multi-day sell-off of almost 13% in the wake of the short-seller report, Kyndryl stock is now down 8.7% on a YTD basis. Over the past year, however, the stock has been an outperformer, rising 46.5%.

Gotham Questions Kyndryl's Profitability
As for the newly published report from short-seller Gotham City Research, the firm has accused Kyndryl of inflating its reported adjusted EBITDA and adjusted free cash flow to create the illusion of profitability and positive cash flow, despite actually incurring losses and consuming cash.
Kyndryl was quick to counter, as a spokesperson said, “Kyndryl rejects in the strongest possible terms the conclusions reached within the report, which was clearly designed to manipulate the company's stock for the short seller's benefit. Kyndryl has never spoken to this firm, and had we been afforded the opportunity to do so, we would have pointed out the many inaccuracies and falsehoods contained in this so-called analysis.”
Without going into the details of the report, what I observed is that Gotham City primarily found issues with Kyndryl's capitalization of costs (which they believe is above the peer average). Overall, the firm believes the cost will be much higher than what is reported and its relationship with its erstwhile holding company, IBM.
While I found the arguments unconvincing—given that for a growing company like Kyndryl, these metrics may naturally differ from those of its larger peers—what concerns me is the auditor's note stating that “the Company did not maintain, in all material respects, effective internal control over financial reporting as of March 31, 2024.” Issues with auditors carry significant weight, as evidenced by the Super Micro Computer (SMCI) saga.
Having said that, let's pore over Kyndryl's operations and financials to get a better idea about the company.
KD's Most Recent Financials
Based on the publicly available figures we have, Kyndryl reported revenues of $3.7 billion for Q3 2024. This represented a yearly decline of 4.9%. Moreover, the company swung to profitability, with earnings per share (EPS) of $0.51 compared to a loss of $0.05 per share reported in the previous year.
Adjusted EBITDA, the bone of contention for Gotham City, came in at $704 million compared to $615 million in the year-ago period. Net cash from operating activities for the nine months ended Dec. 31, 2024, rose to $361 million from $309 million in the prior year.
Overall, Kyndryl closed the quarter with a cash balance of $1.5 billion, which was above its short-term debt levels of $388 million but much lower than the long-term debt levels of $3.1 billion.
About Kyndryl's Operations
Kyndryl is in the midst of a strategic shift, concentrating on high-margin sectors like IT consulting, hybrid cloud, cybersecurity, and artifical intelligence (AI). This transition is expected to drive both revenue expansion and improved margins, strengthening its competitive standing despite lingering concerns over its financials.
With a long history of serving IBM’s clientele, Kyndryl possesses extensive industry expertise and established customer relationships. Simultaneously, partnerships with major cloud providers such as Amazon (AMZN), Microsoft (MSFT), and Google (GOOG) (GOOGL) are opening up new business opportunities through referrals. The company’s move toward an asset-light model enhances its scalability and operational efficiency, aligning with the evolving needs of enterprise IT.
A key strength of Kyndryl lies in its extensive enterprise IT data, accumulated over years of working with a broad customer base. This has enabled the development of "Kyndryl Bridge," an AI-driven platform designed to enhance service automation and optimization. Increased adoption of this system has contributed to an 18% rise in consulting revenue and a 45% increase in contract signings. By providing AI-powered insights, customization, and operational efficiency, it not only improves client performance but also reduces costs through automation, giving Kyndryl an advantage over competitors such as DXC Technology and NTT Data.
With a focus on high-value consulting, cybersecurity, and managed IT services, Kyndryl is positioning itself for significant growth. As businesses continue investing in IT modernization and AI-driven solutions, the company’s evolving strategy and expanding cloud partnerships make it well-placed to capture new market opportunities and solidify its presence in the IT services industry.
Analysts Say KD is a ‘Strong Buy’
Overall, analysts have an average rating of “Strong Buy” for KD stock, with a mean target price of $44.60, which denotes an upside potential of about 40% from current levels. Out of six analysts covering the stock, five have a “Strong Buy” rating and one has a “Hold” rating.
