Kyndryl Holdings (KD 3.08%) is the target of a report from a short-seller that accuses the IT infrastructure company of manipulating financial metrics. Investors are heading for the exits, sending shares of Kyndryl down as much as 15% on Thursday morning and 11% as of 12:00 p.m. ET.
Questions about accounting
Kyndryl is a data center business that was spun out of IBM in 2021. The stock has been a big winner over the past three years, but according to a new short report, not all is as it seems inside the company.
Gotham City Research, which is short Kyndryl shares, put out a report alleging that Kyndryl has artificially inflated its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and free-cash-flow figures, masking what Gotham sees as significant cash burn. The report is also critical of Kyndryl's disclosures when it comes to its relationship with its former parent and predicted the company will encounter higher costs for IBM services in the years to come.
Gotham City estimates 67% to 100% downside to Kyndryl shares from current levels.
NYSE: KD
Key Data Points
Is Kyndryl stock a buy?
It's important to note that Gotham is invested in a decline in Kyndryl's stock, just as investors have a vested interest in their portfolio holdings going up. All analysis, both bullish and bearish, should be viewed in that light, and investors need to draw their own conclusions.
Some of what's included in the report shouldn't be news to Kyndryl shareholders. On its earnings calls, the company has discussed its evolving relationship with IBM and how that could impact results in the quarters to come. But if Gotham's broader accusations prove to be correct, the stock could fall further from here.
We'll likely know more in the days to come should Kyndryl respond to Gotham's allegations. In the meantime, investors would be wise not to make any rash decisions.
