What happened
I guess the bull market hype train is coming for everyone. Bombed-out stock Lumen Technologies (LUMN) popped 25% this week after launching a network interconnection partnership with Microsoft and Alphabet. according to data from S&P Global Market Intelligence.
The stock -- which is still down 58% year to date -- has started to make a small comeback in the last few trading days. But will the momentum last?
So what
Lumen Technologies sells products and services to help data centers -- the backbone of the internet -- run smoother. It has solutions for a variety of internet and connectivity services, providing connectivity and security to customers like Microsoft Azure, one of the largest cloud infrastructure companies in the world.
This week, Lumen launched a new product line in conjunction with some of its largest customers, such as Microsoft and Google Cloud. The product is called ExaSwitch, which helps customers dynamically manage their bandwidth needs across data centers, one of the key services needed to help make internet infrastructure more efficient. Lumen is already operating ExaSwitch in three operating hubs in the United States and plans to roll it out across the world shortly.
A new product launch, plus backing from some of its most important customers, was a positive sign for Lumen shareholders, which is why the stock is soaring this week. With shares down over 80% in the past year even after this bump, there was a lot of pessimism baked into the Lumen share price to start this week. Though we have no idea how financially relevant ExaSwitch will be to Lumen's business, it was incrementally positive enough to see the stock jump 25%.
Now what
Lumen shares have been falling over the past year because of its deteriorating profits and huge debt load. Last quarter, the company only generated an operating profit of $390 million, compared to over $1 billion in the same quarter in 2022. At a market cap of just $2.25 billion, you wouldn't think this is a big deal and that Lumen shares may still actually be cheap if it can keep putting up $390 million in quarterly profits.
But the company has -- to put it lightly -- a little bit of a debt problem. At the end of last quarter, Lumen had $19.7 billion in long-term debt on its balance sheet, which it is going to struggle to pay off unless it can start generating a few billion dollars in cash flow each year. The company is also going to have to start refinancing this debt as it comes due, which will increase its annual interest payments due to the Federal Reserve's rapid hiking cycle.
Investors are worried that Lumen is headed for bankruptcy. Maybe this new ExaSwitch product can save the company, but this stock is still extremely risky right now and has a lot of potential downsides from these levels.
