Lumen Technologies (NYSE:LUMN) is a company that’s most prominently known for its extensive wireline and cable assets. A key player in the telecommunications sector, Lumen is a company that’s neither “sexy” nor high-growth, making this a stock that investors have sold heavily during previous market rallies.
In fact, over the past decade, shares of LUMN stock are down more than 85%, as investors look past the company’s outdated infrastructure and dwindling service appeal to other players with better growth prospects. Additionally, with just under $19 billion in debt on the company’s balance sheet, this is a company that’s been hit hard as a result of rising interest rates. For many investors, bankruptcy appeared to be a likely outcome for the company. That is, until recently.
On a year-to-date basis, LUMN stock is up more than 185% as investors price in a greater likelihood the company makes it through this difficult time. Interest rate cuts from the Federal Reserve are expected to ease the debt burden of companies like Lumen. And it’s important to point out that this is a company that’s still pulling in roughly $1.4 billion in levered free cash flow each and every year.
So, let’s dive into whether the bulls or bears are more likely to be correct on this name moving forward.
Key Points About This Article:
- Lumen’s legacy business hasn’t provided much in the way of demand for its stock, which has plunged over the past decade.
- However, new catalysts could spell more upside for this stock, which is up more than 185% on a year-to-date basis alone.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.
A New $5 Billion Business
Shares of Lumen Technologies surged on August 6 after the company announced the company secured $5 billion in new business. The telecom giant announced that it will expand network capacity and capabilities for key clients such as Microsoft, to support the rising demand seen from data center clients in the U.S. Additional discussions are underway, in which Lumen may secure up to $7 billion in AI revenue opportunities. That could be a very big win for this company, considering Lumen’s overall market capitalization currently sits around $5.3 billion at the time of writing.
Having this stock priced at roughly 1-times forward sales from this announcement (never mind the company’s core legacy business) is incredible. And if an additional $7 billion opportunity is realized, this stock could be among the cheapest in the telecom space right now.
Of course, there’s the pesky reality that Lumen is still losing money on an EPS basis, and will need to see this future demand flow through to its bottom line in order for the stock to see material gains moving forward. But as demand for the company’s next-generation fiber-dense cables increase (alongside demand from AI data centers), the company’s robust network infrastructure could be relied upon by even more clients to handle the unprecedented data flows many are expecting to see.
Strong AI Demand Leading to Improved Outlook?
Aside from this massive revenue opportunity the company announced, another key driver prompting a surge in LUMN stock was Lumen’s better-than-expected Q2 results posted on August 7. The company significantly raised its full-year free cash flow guidance, suggesting that the AI-related revenues it expects to see could materialize in the near-term. And while the company posted an EPS loss of 5 cents per share, this was narrower than most analysts expectations, with revenue also declining 10.7% (not great, but still not as bad as analysts were forecasting).
Accordingly, investors appear to now be viewing the company as a beneficiary of surging AI demand. If Lumen is able to fill a key void in the market for improved data center connectivity, this is a stock that could be very undervalued at current levels. A lot is banking on the company’s future growth prospects and transformation toward an AI play. But with free cash flow guidance increasing, this is a stock with a free cash flow yield of roughly 26% that’s starting to look very attractive at current levels.
Lumen Needs to Prove Itself
Given Lumen’s current financial state, investors may rightly remain on the fence with this stock. The company is still unprofitable, with a large debt load, and a balance sheet that needs some work. But if cash flows do come in above the company’s guidance moving forward, and Lumen can show consistent profitability as a result of its major AI investments, this is a stock that could be very undervalued at current levels. Again, I point to the company’s free cash flow yield as the key metric that makes this stock attractive, at least on a fundamental basis, to many investors.
Fiber and wireline solutions may not be as attractive as other infrastructure areas of the market for investors to focus on. But in order for a truly revolutionary AI future to unfold, companies are likely going to need to continue to invest in these solutions for some time to come. Lumen is among the key players in this realm, and is seeing strong order demand build. If this continues, I think this is a stock that could not only escape concerns around bankruptcy, but potentially fly higher from here.
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