Who needs a rodeo when you've got Lumen Technologies (LUMN) ?
Investors in the Monroe, Louisiana-based telecom may feel like they've been riding a bucking bronco as the struggling company's stock suddenly went yeehawing into the stratosphere.
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Lumen shares soared 33% on August 7, and they're up nearly 300% from a year ago after the company said that it had secured $5 billion in new business thanks to the artificial intelligence explosion's heavy demand for connectivity.
Large companies across industry sectors are seeking to secure fiber capacity quickly, Lumen said, "as this resource becomes increasingly valuable and potentially limited, due to booming AI needs."
The 94-year-old company—which started out as the Oak Ridge Telephone Co. in 1930—said the new business includes a deal with Microsoft (MSFT) . The software giant will use Lumen network equipment to expand its capacity for AI workloads.
As part of the deal, Lumen, formerly known as CenturyLink, will tap Microsoft's Azure cloud services to cut costs.
Microsoft has said that a shortage of data center infrastructure needed to deploy AI models was hampering its ability to capitalize on the current uproar in the technology, according to Reuters.
Lumen CEO cites 'pivot to growth'
Lumen also has a deal with Corning (GLW) as the optics material company’s preferred partner "for its next-generation fiber-dense cable, which will help accommodate the increased data processing that AI requires."
On top of that, Lumen said it is "in active discussions" with customers to nail down another $7 billion in sales to meet the increased demand.
Related: Microsoft stock tumbles after key segment disappoints
Kate Johnson, Lumen’s president and CEO, discussed the company’s recent successes in an earnings call with analysts.
"I'm cognizant of the timing of this call because over the past two days, the markets have been a bit noisy with lots of uncertainty about the health of the economy in the next six to 12 to 18 months," she said.
"In contrast, the announcement we made last night about Lumen's pivot to growth is all about building critical infrastructure to support the AI economy for the next several decades," Johnson added.
Bear in mind, that this is the same company that said in March it was closing of a series of financial transactions that would give Lumen "strengthened liquidity position" and announced in April that it was trimming 7% of its workforce--over 1,000 staffers- to align with Lumen's "shapeshifting and focus on its strategic priorities."
Lumen also earned a ranking of 99 out of 100 on Debtwire's Likely to Distress (LTD) scoreboard, according to LightReading.
So what's going on?
“To summarize what's happening,” Johnson told analysts, “the dramatic rise in AI innovation springs explosive growth in data center build-outs, and data centers simply have to be connected.”
"And while we're excited by the progress of our operational turnaround in legacy core network services," she noted, "the real breakthrough to share with you is how we're repositioning the company for the future in the growing market of AI."
Lumen reported a second-quarter loss of 13 cents per share, down from earnings of 10 cents per share a year ago, and missing the Zacks consensus for a loss of 9 cents per share.
Revenue totaled $3.27 billion, down 10.7% from a year ago and edging estimates of $3.26 billion.
Free cash flow, money that is left over after a business pays its operating expenses, was negative $156 million compared with negative $896 million a year ago.
Christopher David Stansbury, chief financial officer, said that sales of PCF, Lumen’s modular network fabric that allows companies to design custom network architecture, will close any free cash flow deficit between now and “when we reach sustainable positive free cash flow growth.”
Analyst notes 'steep revenue declines'
"We will have ample free cash flow to invest in our transformation and reduce debt," he said.
Several analysts adjusted their price targets after Lumen announced its results and business deals.
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TD Cowen raised the firm's price target on Lumen to $7 from $2.50 and kept a hold rating on the shares, according to The Fly.
The firm said Lumen posted mixed second-quarter results, trumped by an update on its GenAI wins. There are still many unknowns, but essentially, the company is to receive meaningful upfront cash from hyper scalers to fund meaningful buildouts.
MoffettNathanson raised the firm's price target on Lumen to $3 from $1 and kept a sell rating on the shares.
The stock has surged nearly seven-fold over the last few weeks due to the market waking up to the idea that there has been a legitimate uplift in demand for fiber infrastructure to support the growth in artificial intelligence data centers, the firm said.
Lumen's announced deals with Microsoft to expand its network capacity and with Corning, in which Lumen reserved 10% of Corning's global fiber capacity over the next two years, "confirmed that this is real."
However, MoffettNathanson said the company still faces steep revenue declines in its existing business.
Goldman Sachs upgraded Lumen to neutral from sell with a price target of $4, up from $1.
The company's new business announcements, tied to winning new contracts to build and operate long-haul fiber connectivity between datacenters and other enterprise facilities, reflect a "meaningful growth opportunity," the firm said.
Goldman believes Lumen's latest news provides the company “with a well-defined, long-dated stream of cash flows that is accretive to the equity.”
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