Shares of broadband and fiber network operator Lumen Technologies (LUMN +0.75%) rocketed 75.2% higher this week, according to data from S&P Global Market Intelligence.
The company reported a surge of new revenue deals related to artificial intelligence (AI) and also reported earnings this week. While Lumen has struggled under a heavy debt load with declining legacy businesses in recent years, the AI revolution appears to be offering Lumen new growth opportunities. Because of its depressed valuation and the surprise AI news, the beaten-down deep value stock soared.
NYSE: LUMN
Key Data Points
Can new AI products break Lumen out of its years-long decline?
There were some hints over the past few weeks that a breakout was coming for Lumen. On July 24, Lumen announced a deal with Microsoft (MSFT 1.12%) according to which Lumen would use Microsoft's cloud tools to modernize and streamline its own tech stack, which the company said would save $20 million over the next 12 months. In addition, Microsoft named Lumen as a strategic partner for new and existing low-latency fiber routes to connect artificial intelligence data centers, which increasingly require fast inter-data-center connectivity. Lumen then followed that up on Aug. 1, announcing a deal with fiber cable giant Corning (GLW +6.08%), reserving 10% of Corning's fiber capacity for the next two years. That lent confidence to Lumen's next-gen AI network initiative.
Then this week, Lumen put some hard numbers to its AI opportunity. On Monday, Aug. 5, it announced $5 billion in AI-related deals, as well as $7 billion in new potential deals currently under discussion.
That announcement sent the stock soaring the next day. Then, after the bell on Tuesday, Aug. 6, Lumen's earnings report took things up another notch. While Lumen's bottom line missed expectations, the company actually beat expectations for revenue.
Some green shoots on revenue seemed to overwhelm the bottom-line miss, which the company attributed to investment in the AI opportunity. Notably, the company has separated its product set into three categories -- "grow," "nurture," and "harvest" -- according to whether the products are set for growth, declining, or somewhere in between. The grow segment continued to see positive growth, while the nurture and harvest segments saw slowing declines. Overall, the company's revenue decline slowed, perhaps indicating a long-awaited inflection to growth isn't too far away.
And perhaps extra pleasing to investors was CEO Kate Johnson's announcement of a $1 billion cost-cutting program by 2027. So the combination of new AI deals along with a big cost-cutting plan was music to investors' ears.
Lumen is not without risk, but it is certainly interesting
Lumen's gains this week are momentous because it was a deep value stock for which bankruptcy was a distinct possibility heading into the year. And even with all the current positive news, revenue and EBITDA did decline last quarter, while the company still holds a heavy $18.6 billion debt load. So the stock is still risky.
But with big, well-funded AI and cloud names needing more connectivity as they build out more data centers, it seems that Lumen may have a new growth business on its hands. With its debt having been restructured earlier this year and maturities pushed out to future years, giving Johnson more time to complete her turnaround, it appears that a lot of progress is being made.
