What happened
Shares of Lumen Technologies (LUMN -5.15%) have tanked today, down by 22% as of 1 p.m. EST, after getting a downgrade from Wall Street. The stock has surged in recent days along with many other heavily shorted companies, but Morgan Stanley does not believe the move is justified by fundamentals.
So what
Analyst Simon Flannery lowered his rating on Lumen from equal weight (equivalent to a neutral) to underweight (equivalent to a sell) while maintaining a price target of $12.50. The analyst believes that the rally was "primarily driven by technical factors such as short covering."
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Following the monstrous short squeeze and gamma squeeze for GameStop that has been occurring in recent weeks, several stocks with high short interest have been soaring. Many of those stocks are starting to fall back down to Earth today. As of Jan. 15, Lumen's short interest was approximately 108.3 million shares, or roughly 11% of its float.
Now what
"This move comes despite some potential headwinds from rising corporate taxes, a potential minimum corporate tax rate, fading COVID related demand and lower regulatory support from 2022 onwards," Flannery wrote in a research note to investors. "This could make it challenging for Lumen to achieve their deleveraging targets in the next couple of years."
The analyst notes that the telecommunications company, which was previously named CenturyLink but rebranded in September, saw revenue decline by 3.4% in the third quarter and expects continued headwinds on the wireline side of the business.
