Shares of Lumen Technologies (LUMN +10.13%) -- formerly CenturyLink up until late 2020 -- had another poor outing in 2023. With just a few weeks left to go, the struggling telecom and internet-infrastructure stock is down another 72% this year, continuing a long-standing downtrend for the better part of a decade now.
And yet, by one metric, Lumen Technologies looks like it could be an incredibly cheap stock. Could 2024 be the year the business turns things around and rockets higher, turning into a millionaire-maker investment?
NYSE: LUMN
Key Data Points
Issues with the business model (still) being ironed out
Decades after the internet began to be widely commercialized, the worldwide web is still very much a hotbed of secular growth for investors. But unfortunately for Lumen, its telecom and internet infrastructure-heavy model of yesteryear has left it highly indebted.
And in a rising and higher interest rate environment like the market has been in for some two years now, having lots of debt isn't a good position to be in (higher rates raise interest expense and lower the value of a business).
As of the end of September 2023, Lumen had just $311 million in cash and short-term investments, and $1.9 billion in assets held for sale, which include the $1.5 billion net-of-tax sale of its EMEA (Europe, Middle East, and Africa) business, which closed on Nov. 1. Those proceeds will go toward paying off a small bit of the $19.7 billion in long-term debt Lumen had at the end of September.
A new CEO, Kate Johnson, who came from Microsoft (MSFT +4.64%) just over a year ago, is in the midst of trying to right the ship at Lumen. The strategy involves solidifying the core business (which isn't going so well since revenue fell 17% year over year in 2023's third quarter), driving commercial excellence (better sales execution, again not going so well as of late), and innovating for growth (new products to sell customers, especially to businesses). Honestly, this solidifying the core business so as to pay down debt, all the while trying to foster expansion into new markets, isn't all that new from past Lumen management teams.
The good news, though, is that Lumen did return to profitability as measured by free cash flow (FCF) last quarter ($38 million generated). But even this is merely a consolation prize, as FCF also steadily declined over the last few years.
At this juncture, the last remaining valuation metric that still makes Lumen stock look like a great buy is the price-to-book value, currently sitting at under 0.7. A price-to-book value of under 1.0 implies the business is being valued for less than its total assets are worth, but it can also be a sign of serious trouble that still lies ahead.
"Cheap for a reason" has been the unshakable story
Lumen's new management team went shopping and bought shares after the Q3 earnings report, supplying a nod of confidence that the stock is indeed undervalued.
That said, the market clearly thinks Lumen is still deep in the woods even with yet another business sale to pay down debt. Why? A myriad of newer and software-driven internet-infrastructure companies have popped up, many of them loaded with cash and very little debt. Some of these companies, especially edge-computing infrastructure businesses, have been eating the most valuable part of this market: business internet connectivity needs.
Lumen's infrastructure network seems to still be woefully unprepared to compete with new business-product offerings, and it shows in the quarterly financial trends. After years of looking like a cheap stock, with FCF now barely above water, Lumen looks like a value trap as much as ever before.
Of course, investors wanting to bet on a short-term mispricing headed into the new year alongside management might be able to get a quick pop in the stock if Lumen can stem the most recent revenue declines. However, unable to capitalize on secular growth trends in the internet-infrastructure market, Lumen Technologies stock doesn't look like a long-term millionaire-maker investment.
