After years of declines and fears of bankruptcy, the tide might have turned for the beleaguered telco Lumen Technologies (LUMN +0.24%). The stock suffered amid its dated infrastructure and lack of appealing service offerings. Also, with close to $19 billion in debt and continuing financial struggles, its long-term survival was in question.
Fortunately, relief might have come thanks to artificial intelligence (AI). The company's extensive network positions it to provide connectivity across data centers, giving it a critical role in today's technology industry. But does that make the stock a buy after its massive gains? Let's take a closer look.
The state of Lumen Technologies
Before this partnership, it had appeared the tech world had passed by Lumen. The company was best known for its extensive network of wireline and cable assets. Investors increasingly dropped its services, and a stock that once topped $45 per share in 2011 briefly traded below $1 per share in the early summer of 2024.
As demand for such services fell, it touted capabilities in networking, cybersecurity, collaboration, and edge solutions, but these efforts failed to stem the revenue declines.
In the first half of 2024, revenue of $6.6 billion dropped 11% from the same period last year. Lumen managed to cut operating expenses, leading to a modest operating income and a profit of $8 million in the first six months of the year. Nonetheless, since that included a $49 million loss in the second quarter, it was unclear that Lumen had permanently stemmed its losses.
What has changed
However, Lumen just struck a deal that could bring a dramatic break from its past as it partners with Microsoft. The company's Private Connectivity Fabric will expand Microsoft's data center capacity, while Azure will hasten a digital transformation across Lumen by spearheading AI initiatives. This makes Lumen a critical component of data center functionality, making it an essential AI company.
Lumen, in turn, made a deal with Corning to claim 10% of the company's fiber capacity for the next two years. Also, Lumen announced that it secured around $5 billion in new business fueled by rising demand for AI. Additionally, another deal with Blue Planet, a division of Ciena, will help consolidate its legacy systems, streamline delivery of service, and digitize network assets.
Effects on Lumen as a company
As of the time of this writing, such deals have increased Lumen's stock price by nearly 500% since the beginning of July. Consequently, the stock trades at more than $6 per share as of the time of this writing, taking it above penny stock status for the first time in more than a year.
NYSE: LUMN
Key Data Points
Despite these gains, investors should not necessarily be in a hurry to buy. For one, the company has to address its $19 billion debt burden, which remains a challenge considering Lumen's market cap of just above $6 billion.
Moreover, while revenue will likely rise, it remains unclear how the deals will affect its financials. The deals with Corning and Ciena are added capital expenditures, meaning Lumen will have to spend significantly to secure this business. Thus, investors will have to wait for future earnings reports to see how much the deals help Lumen.
Should investors buy?
Considering Lumen's current financial conditions, investors should probably treat this stock as a hold.
Indeed, the deals appear to offer a benefit that has eluded Lumen for years, aligning its business with the modern telecom industry. As a critical part of the AI infrastructure, Lumen may avert a possible bankruptcy that looked increasingly likely until a few weeks ago. Given that potential for growth, the rise in the stock price is understandable.
However, it is unclear whether excitement over the deals or the prospect of improved financials drives the telecom stock higher. For now, it remains unknown how the increased capital spending will affect the company's heavy debt burden.
Also, investors do not yet know whether the deals will bring sustained profitability and the ability to earn more business and hopefully reduce the debt. Until the company or its results answer these questions, investors should probably watch Lumen stock rather than buy it.
