Lumen Technologies (LUMN 1.63%) and Broadcom (AVGO 2.66%) were both driven higher by the buying frenzy in artificial intelligence (AI) stocks. Over the past 12 months, Lumen's stock surged more than 70% as Broadcom's stock rallied over 60%.
Lumen, the telecom company formerly known as CenturyLink, impressed the bulls by signing a new AI infrastructure deal with Microsoft and a fiber supply deal with Corning. Broadcom dazzled the market with its soaring sales of its AI-oriented networking chips. So which of these high-flying AI stocks is a better buy right now?
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Lumen's surprising transformation into an AI play
Lumen is one of America's largest wireline service providers. But instead of expanding into the wireless market like AT&T and Verizon Communications, Lumen doubled down on the slow-growth wireline market through a series of mergers and acquisitions.
Lumen aimed to generate slow but stable growth from that aging market as economies of scale kicked in. It also bundled additional cloud, security, and collaboration services with its business wireline plans, and it expanded its faster fiber networks.
NYSE: LUMN
Key Data Points
Lumen's smaller fiber business grew, but that growth couldn't offset the secular decline of its business wireline division. In 2022, its revenue fell 11% to $17.5 billion and it racked up a net loss of $1.5 billion.
In 2023, its revenue declined 17% to $14.6 billion as its net loss widened to a staggering $10.2 billion. Those steep losses caused Lumen to suspend its dividend in November 2022, and its stock slipped below $1 this June.
But since then, Lumen's stock has more than tripled. The main catalyst was its partnership with Microsoft Azure, the world's second-largest cloud platform. Through that deal, Lumen will upgrade Azure's cloud and AI infrastructure with new networking and fiber equipment. Another catalyst was its deal with Corning, which gave it a steady supply of fiber optic cables.
Lumen was still shouldering $18.5 billion in long-term debt with $1.6 billion in cash and equivalents on its balance sheet at the end of the first quarter of 2024. Its deal with Microsoft could ease some of that pressure, stabilize its near-term growth, and help it narrow its net losses. But for 2024, analysts still expect its revenue to decline 11% to $13 billion as it narrows its net loss to $121 million. With an enterprise value of $21 billion, Lumen might seem cheap at 1.6 times this year's sales -- but it faces a lot of unpredictable challenges and is expected to stay unprofitable for the foreseeable future.
Broadcom's AI chips are becoming a major growth engine
Broadcom expanded over the past decade by acquiring other chipmakers and infrastructure companies. In its latest quarter, it generated 58% of its revenue from its semiconductor business, which sells a wide range of wireless, optical, and data storage chips, while the remaining 42% came from its infrastructure software.
NASDAQ: AVGO
Key Data Points
Broadcom relied on Apple for 20% of its sales in fiscal 2022 and fiscal 2023 (which ended last October), but its acquisition of the cloud software giant VMware last November should significantly dilute that customer concentration.
In fiscal 2022, its revenue rose 21% to $33.2 billion as its adjusted EPS grew 34%. In fiscal 2023, its revenue increased 8% to $35.8 billion as its adjusted EPS climbed another 12%. Its growth cooled off as the 5G upgrade cycle ended and macro headwinds drove some IT infrastructure companies to rein in their spending.
But for fiscal 2024, analysts expect Broadcom's revenue and adjusted EPS to surge 44% and 13%, respectively, as it integrates VMware and sells more networking and optical chips for the AI-oriented data center market. It expects to sell at least $11 billion in AI chips in fiscal 2024, which would be equivalent to more than a fifth of its projected full-year revenue.
In fiscal 2025, analysts expect its revenue and adjusted EPS to grow 17% and 27%, respectively, as it laps the VMware acquisition. Those are solid growth rates for a stock that trades at 24 times forward earnings, and it pays a decent forward dividend yield of 1.5%. It ended its latest quarter with $9.8 billion in cash and equivalents, but it had also accumulated $71.6 billion in long-term debt from its streak of big acquisitions across the chip and software sectors.
The obvious winner: Broadcom
Lumen's deal with Microsoft revived its business, but it isn't out of the woods yet. I'll need to see a few quarters of actual progress before I consider the deal to be a game changer for its struggling business wireline division.
Meanwhile, Broadcom continues to fire on all cylinders as it expands its business. So for now, it still makes more sense to stick with the higher-growth chip and software leader instead of taking a chance on the telecom underdog's turnaround.
