Lumen Technologies (LUMN) has been on a wild ride lately, with its stock shooting up an incredible 352% in just the last month. This once-struggling telecom giant is now turning heads, thanks to its strategic partnerships with Microsoft (MSFT) and Corning (GLW), as it dives headfirst into the artificial intelligence (AI) revolution. But with all this excitement, there are still some big questions. Is this stock's surge sustainable, or are we looking at a bubble that's about to pop?
Some analysts think the big breakout in LUMN might be driven by short covering, and caution investors to consider Lumen's future revenue potential alongside its current debt and liquidity issues. Even though the stock's consensus rating on Wall Street has improved from "sell" to “hold" over the last month, LUMN is now trading way above analysts' mean price target of $3.46.
So, with AI rapidly changing the game and Lumen's stock on the rise, can LUMN's momentum continue - or has the moment passed? Let's examine Lumen's strategy and see if it's set for long-term success in the AI era.
Lumen’s Recent Surge
Lumen Technologies (LUMN), a key player in the telecommunications sector, has made headlines with its ambitious transition into the AI-driven digital landscape. The company, which has traditionally focused on providing network services and communications solutions, is now leveraging AI to enhance its service offerings.
Over the past 52 weeks, Lumen stock has surged by 213% to its current price north of $5 per share. This year alone, Lumen has seen a remarkable 210% increase, largely driven by its outsized gains in the past month.
The latest earnings report backs up this impressive price action, showing a big improvement in net losses from $8.736 billion in Q2 2023 to $49 million in Q2 2024. That translates to a diluted loss per share of $0.05 for the quarter. Despite the mixed financial results, Lumen's management is staying positive about the future.
They highlighted continued success in North American Large and Mid-Market Enterprise sales, with more new customers and year-over-year growth in net total contract value across all channels. Lumen also reported better customer satisfaction, which they think will lead to lower churn, higher sales, and better overall revenue growth over time.
Looking at valuation metrics, Lumen's price-to-sales ratio is 0.32, much lower than the sector median of 1.24. This suggests that the stock might be undervalued compared to its peers, potentially offering a good entry point for investors. That said, the low valuation also reflects ongoing concerns about the company's ability to keep growing amid financial hurdles.
Fundamentals Fueling Lumen's Growth
At the heart of Lumen's remarkable growth story lies its strategic partnerships with tech giants Microsoft and Corning. The company's agreement with Corning for a substantial supply of next-generation optical cable is set to more than double Lumen's U.S. intercity fiber miles, enabling it to meet the surging demand for high-bandwidth applications and AI workloads. This partnership positions Lumen to cater to major data center operators like Microsoft for years to come.
Speaking of Microsoft, Lumen's new strategic partnership with the tech behemoth is another fundamental driver of growth. Microsoft has chosen Lumen to expand its network capacity and capability to support the rising demand on its data centers due to AI. Additionally, Lumen will leverage Microsoft Azure to accelerate its own digital transformation and AI initiatives, potentially saving tens of millions of dollars in the process.
Lumen's partnerships with Microsoft and Corning highlight its commitment to leading the AI revolution. By strengthening its infrastructure and collaborating with key players, Lumen is setting itself up for long-term growth in the cloud computing and AI era.
Lumen's Future Prospects
In its latest Q2 2024 earnings report, Lumen offered updated full-year guidance that's a bit of a mixed bag. The company now expects adjusted EBITDA between $3.9-$4.0 billion, which is a step down from the previous range of $4.1-$4.3 billion. But on the bright side, Lumen has bumped up its free cash flow guidance to $1.0-$1.2 billion, a big jump from the earlier estimate of $100-$300 million. The company also expects lower net cash interest and higher capital expenditures compared to its previous outlook.
These updated numbers have caught analysts' attention, who are carefully weighing how they might impact Lumen's future. Right now, most analysts (8 out of 10) are recommending a “hold” on the stock. One analyst suggests a “moderate sell,” while another says it's a “strong sell.” This mixed bag of opinions results in a consensus opinion of “hold,” which is less bearish than one month ago, when the stock was rated a “moderate sell” overall.
Recently, Goldman Sachs, JPMorgan, and Citi have all upgraded Lumen to a "hold" equivalent rating. However, the average analyst price target is $3.46, which is about 37% lower than the stock's current price. This gap suggests that many analysts think LUMN is overvalued right now, even with the potential for future earnings growth.
The Final Verdict: Is It Too Late to Jump on the Lumen Surge?
Given Lumen Technologies' strategic partnerships and impressive stock performance, it might seem tempting to jump on the bandwagon. However, with a significant downside to the mean price target and mixed analyst sentiment, the current valuation suggests caution is appropriate - and a high risk tolerance is likely a prerequisite.
While Lumen's moves in the AI space are promising, potential investors should be wary of the recent surge's sustainability, and consider waiting for a more favorable entry point - and then beginning cautiously, with a smaller than usual stake.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
