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Short-seller Gotham City Research calls Kyndryl ‘uninvestable,’ raising concerns over its financial reporting, cash flows, and insider selling.
Kyndryl Holdings (KD) shares plunged as much as 12% on Thursday after short-seller Gotham City Research accused the IT services provider of accounting manipulation, claiming the stock is significantly overvalued and could drop by as much as 67% or even to zero.
In a report titled ‘Like the old IBM, except with an Undisclosed Cost Problem: Part I,’ Gotham alleged that Kyndryl has misrepresented its financial health by inflating adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and adjusted free cash flow to create “the illusion of profitability.”
Kyndryl, which spun off from IBM in 2021, has benefited from special pricing arrangements with its former parent, according to Gotham.
The short-seller highlighted that Kyndryl’s payments to IBM for services totaled around $4 billion in the fiscal year 2021, roughly 25% of its total cost of services. By fiscal year 2023, those payments had declined 60% to $1.4 billion.
Gotham argues that cost reductions, rather than operational improvements, are behind Kyndryl’s post-spinoff margin expansion.
IBM’s stock traded in the red on Thursday morning, edging lower by 0.5%.
The report further warned that these favorable terms are set to expire, predicting a sharp increase in IBM service costs in 2025 and 2026 that could weigh on earnings.
CEO Martin Schroeter has downplayed cost pressures in the past, but Gotham estimates Kyndryl faces an additional $1 billion to $2 billion in expenses over the coming years.
Another red flag, according to the report, is Kyndryl’s decision to stop disclosing IBM-related costs after fiscal 2023. Gotham suggests this omission may indicate the company is bracing for significantly higher expenses that could challenge its growth narrative.
Gotham’s report also raised broader concerns about Kyndryl’s financial reporting. It identified discrepancies in the company’s reported payments to IBM between 2019 and 2023 and flagged a suspiciously stable $1.38 billion in related-party service costs across multiple reporting periods.
The company also pointed to Kyndryl’s capitalized costs, which it says are 13.6 times higher than those of industry peers. Adjusted EBITDA, Gotham estimates, would be 61% to 72% lower if Kyndryl applied industry-standard accounting practices.
Additionally, the report questioned Kyndryl’s reported cash flows, highlighting an unusually low days sales outstanding (DSO) of 34 days, which is well below the peer average of 80 days, according to the company.
Gotham suggested that Kyndryl may be relying on receivables factoring to inflate its cash position artificially.
The short-seller also cast doubt on Kyndryl’s “Total Signings” metric, which has increased from $13.5 billion in the fiscal year 2021 to $16.3 billion in 2024, despite declining total revenue.
A recently disclosed Critical Audit Matter in Kyndryl’s 2024 10-K added to concerns, with the company’s auditor stating it did not maintain “effective internal control over financial reporting” as of March 31, 2024.
Gotham also noted that 50% of Kyndryl’s management compensation is tied to “Adjusted Operating Cash Flow,” a metric the company has not disclosed since 2021.
It flagged that insider selling has also increased recently, further fueling concerns.
Gotham concluded that Kyndryl’s stock remains “uninvestable” due to these concerns.
On Stocktwits, retail sentiment around Kyndryl’s stock jumped to ‘extremely bullish’ territory.
Some investors dismissed the accusations, with one user stating they plan to hold onto their shares.
Another expects a slow recovery through to May, followed by a jump when earnings happen.
The allegations overshadowed Kyndryl’s announcement of an expanded partnership with Google Cloud.
The collaboration includes a new Mainframe Modernization with Gen AI Accelerator Program, leveraging Google’s Gemini models to enhance mainframe integration, COBOL-to-Java conversion, and AI training using on-premise data.
Kyndryl’s stock has fallen 14% in 2025 but remains up nearly 40% over the past 12 months.
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