The underdog telecom firm’s inventory soared practically fivefold over the previous 12 months.
Lumen Applied sciences (LUMN 1.50%), the telecom firm previously often called CenturyLink, gave the impression to be in dire straits only a few years in the past. Its income was declining, it was racking up steep losses, and it suspended its dividend in 2022.
However over the previous 12 months, Lumen’s inventory soared 374% as a brand new AI infrastructure cope with Microsoft breathed contemporary life into its enterprise. May these tailwinds propel its inventory even increased over the subsequent 12 months?
Picture supply: Getty Photos.
What occurred to Lumen earlier than its AI deal?
Lumen is without doubt one of the largest wireline service suppliers in the US. In contrast to AT&T and Verizon, which expanded their wi-fi networks to cut back their dependence on wireline connections, Lumen shunned the wi-fi market and expanded its wireline enterprise by means of a sequence of mergers and acquisitions.
Lumen anticipated to generate gradual however regular progress as economies of scale kicked in. It additionally expanded its sooner fiber networks and bundled extra cloud, safety, and collaboration companies into its enterprise wireline plans.
Lumen’s smaller fiber enterprise grew, however that progress was offset by the persistent decline of its enterprise wireline phase. In consequence, its annual income fell for the previous 5 consecutive years. Over the previous two years, its adjusted earnings earlier than curiosity, taxes, depreciation, and amortization (EBITDA) margins shrank and it racked up steep losses.
|
Metric |
2020 |
2021 |
2022 |
2023 |
|---|---|---|---|---|
|
Whole Income |
$20.71B |
$19.69B |
$17.48B |
$14.56B |
|
Income Progress |
(4%) |
(5%) |
(11%) |
(17%) |
|
Adjusted EBITDA Margin* |
41.8% |
42.9% |
39.2% |
31.8% |
|
Web Earnings (Loss) |
($1.23B) |
$2.03B |
($1.55B) |
($10.30B) |
Knowledge supply: Lumen Applied sciences. *Excluding particular objects.
That is why Lumen’s inventory dropped beneath $1 this June. However in July, its inventory soared after Microsoft, which owns Azure, the world’s second largest cloud infrastructure platform, signed a brand new networking and fiber cope with Lumen. By that partnership, Lumen will improve Azure’s infrastructure to help the long run progress of its cloud and AI companies. Lumen additionally signed a cope with Corning to safe a gradual provide of fiber optic cables for these sweeping upgrades.
What’s subsequent for Lumen?
In early August, Lumen claimed it had secured $5 billion in new contracts (together with the Microsoft deal) associated to the AI connectivity market. It additionally mentioned it was in “lively discussions” to “safe one other $7 billion in gross sales alternatives” and would goal to “greater than double its intercity community miles over the subsequent 5 years.”
Primarily based on these statements, Lumen may probably generate $5 to $12 billion in income over the subsequent 5 years ($1 to $2.4 billion yearly) from its new AI-related contracts. That will be equal to 7% to 16% of its income in 2023, however it’s unclear if these tailwinds can totally offset the secular decline of its non-AI enterprise wireline phase.
Analysts count on Lumen’s income to say no 11% to $13 billion in 2024, adopted by a milder 4% dip to $12.4 billion in 2025 because the macro setting warms up, it expands its fiber enterprise, and it acknowledges extra income from its AI contracts.
Nonetheless, Lumen plans to “pull ahead” a few of its deliberate spending for 2026 and 2027 to 2025 to satisfy these new AI knowledge middle offers. In consequence, it expects its adjusted EBITDA to say no from $4.6 billion in 2023 to $3.9 to $4 billion in 2024. Analysts count on its adjusted EBITDA to drop to $3.9 billion in 2024 and slip to $3.7 billion in 2025.
These lackluster expectations point out Lumen’s enterprise will not expertise a speedy restoration over the subsequent 12 months. It is also nonetheless saddled with $18.4 billion in long-term debt and a staggering debt-to-equity ratio of 70. Nonetheless, it expects its new contracts to spice up its free money circulate (FCF) from adverse $878 million in 2023 to constructive $1 to $1.2 billion in 2024. It additionally nonetheless had $1.5 billion in money and equivalents on the finish of its newest quarter.
The place will Lumen’s inventory be in a 12 months?
Lumen will not go bankrupt anytime quickly, and its inventory nonetheless seems undervalued relative to its friends. With an enterprise worth of $23.4 billion (which incorporates all of its long-term debt), it trades at simply 1.8 instances this 12 months’s gross sales and 6 instances its adjusted EBITDA. By the identical measure, AT&T and Verizon commerce at 6.3 and 6.8 instances this 12 months’s gross sales, respectively.
But Lumen’s inventory can solely be thought of low-cost if it really grows its income, retains its FCF constructive, and turns worthwhile once more. We in all probability will not know if it will possibly obtain all of these targets inside the subsequent 4 quarters.
So for now, I count on Lumen’s inventory to primarily commerce on the short-term information relating to its AI-oriented companies and the broader AI market. Its draw back potential may be restricted by traders’ hopes for its future progress, however its upside potential is also capped by considerations about its persistent losses, shrinking margins, and excessive debt. Subsequently, I nonetheless count on Lumen’s inventory to commerce sideways and sure underperform its extra worthwhile business friends over the subsequent 12 months.
Leo Solar has positions in AT&T. The Motley Idiot has positions in and recommends Microsoft. The Motley Idiot recommends Corning and Verizon Communications and recommends the next choices: lengthy January 2026 $395 calls on Microsoft and brief January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure coverage.
