We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Lumen Surges 241% YTD: Will the Stock Sustain Momentum in 2025?
Read MoreHide Full Article
Lumen Technologies, Inc’s (LUMN - Free Report) shares have surged 240.9% year to date (“YTD”), outpacing the S&P 500 composite and sub-industry’s growth of 27.3% and 57.3%, respectively.
YTD Price Performance
Image Source: Zacks Investment Research
Closing at $6.23 as of yesterday’s trading session, LUMN stock is currently trading 39.7% below its 52-week high of $10.33 attained on Nov. 11, 2024.
Lumen is a global communications services provider which operates one of the most interconnected networks globally. LUMN stock has been surging amid AI-driven demand for its private connectivity fabric (“PCF”) solutions and other digital offerings. Will the company’s efforts to capitalize on the fiber opportunity bear fruit and propel stock upwards?
Let us dig deeper and find out.
AI Deals Propels LUMN Stock
Increasing demand for Lumen's PCF solutions amid rapid AI proliferation has been emerging as an encouraging development. Lumen has secured an additional $3 billion in incremental PCF deals, bringing the total to $8 billion in new PCF sales since June 2024. As AI surmounts various spheres, large companies across various industries urgently seek fiber capacity, which is becoming highly valuable and potentially scarce.
Lumen has been inking deals with tech giants for its PCF solutions. In November 2024, the company announced a collaboration with Alphabet’s (GOOGL - Free Report) Google Cloud to power proactive data insights and AIOps across its network. Lumen has utilized Google Cloud’s databases, infrastructure, and BigQuery data and analytics platform to create a Lumen Digital Twin for gaining insights across the Lumen network in real time. Alphabet has chosen Lumen to expand network capabilities for Google Cloud to cater to the increasing demand for its services and foster AI innovation.
Before that, Lumen partnered with Amazon (AMZN - Free Report) to boost data center connectivity and enhance network delivery of cloud technologies. The company will leverage Amazon Web Service (“AWS”) tech (including AI and machine learning) to upgrade its applications and systems. In turn, the company will provide fiber connectivity to AWS data centers. This will aid enterprise clients in building and delivering scalable AI applications across AWS local zones and regions.
It teamed up with Meta Platforms (META - Free Report) to elevate the latter’s network capabilities. The expanded network will deliver a dedicated interconnection for Meta's cutting-edge infrastructure.
Increasing demand for Lumen services, particularly for Waves and IP in its large enterprise and mid-market segments remains a highlight. Year to date, IP sales and Wave sales are up 18% and 25% (through September). Lumen also has expanded its high-speed IP service to include 400-gig ports in 14 other markets. 400-gig Waves are available in more than 70 markets. It also has further expansion plans this year.
LUMN Raises Outlook
Lumen raised its free cash flow guidance for 2024, driven by higher cash flows associated with PCF sales growth. For 2024, free cash flow is anticipated to be between $1.2 billion and $1.4 billion. Earlier, the company expected free cash flow in the range of $1-$1.2 billion.
$1 Billion in Cost Cuts for LUMN
Lumen continues to progress with its turnaround and is striving to boost operational efficiency. The company has been anticipating $1 billion in cost savings by the end of 2027 through planned infrastructure simplification across the network, product portfolio and IT. It has been looking to integrate the network across all four different architectures, by engineering them into one simplified standardized network fabric. This integration will also aid in product portfolio simplification. Management expects to significantly reduce the product count from thousands of product codes to a target of nearly 300.
Lumen’s Momentum in Quantum Fiber Business
Continued investments in Quantum Fiber and enterprise business are positives. Lumen anticipates witnessing healthy momentum in the Quantum business in the upcoming quarters. The company added 43,000 Quantum Fiber subscribers, taking the count to 1 million in the reported quarter. In the third quarter, the company added 131,000 Fiber broadband-enabled locations. As of Sept. 30, 2024, the total enabled locations in the retained states were 4 million. The company is targeting to achieve 500,000 enabled locations in 2024.
Improving Estimate Revision Activity
Analysts appear bullish regarding the stock as indicated by upward estimate revisions.
Analysts have improved their earnings estimates for the current quarter to a loss of 8 cents per share compared with a loss of 22 cents per share in the past 60 days. The estimates for the current year have been improved to a loss of 38 cents per share from a loss of 59 cents in the same period.
Image Source: Zacks Investment Research
LUMN’s Discounted Valuation
From a valuation perspective, LUMN is trading at a massive discount. Going by its trailing 12-month price-to-sales ratio, it is trading at a multiple of 0.46, much below the industry’s ratio of 10.65.
Image Source: Zacks Investment Research
Headwinds in the Legacy Business & Higher Costs Ail LUMN
Lumen continues to witness weakness in the legacy business. In the third quarter of 2024, Lumen’s total revenues declined 11.5% year over year to $3,211 million. This decline was due to the negative impact of divestitures, commercial agreements and the sale of the CDN business. As Lumen shifts toward newer growth products like fiber and cloud-based offerings, the secular headwinds in the legacy business will continue to prove a strain on the top-line expansion at least in the near term.
Incremental costs in expanding new business will prove a drag on the margins. For 2024, Lumen continues to expect adjusted EBITDA in the band of $3.9-$4 billion and capital expenditures to be between $3.1 billion and $3.3 billion. Lumen added that given the overall business trends and initial cost impacts from the incremental PCF sales, it expects 2024 EBITDA at the low end of the guided range.
The company continues to expect 2025 EBITDA to be below the levels of 2024, owing to the investments in transformation costs along with higher startup costs for PCF sales and legacy revenue declines. Lumen expects EBITDA to significantly rebound in 2026 and register growth thereafter.
LUMN’s Debt Load Worrisome
LUMN has a debt-heavy balance sheet. As of Sept. 30, 2024, the company had $2.64 billion in cash and cash equivalents with $18.142 billion of long-term debt compared with the respective figures of $1.495 billion and $18.411 billion as of June 30, 2024.
Though opportunities presented by the rapid proliferation of AI are positive, tight competition in the AI space could prove to be an impediment. Massive debt load and pressured top line remain concerns, despite discounted valuation. Consequently, it might not be a prudent investment decision to bet on the stock at the moment. However, long-term stakeholders and investors already owning the stock could stay put.
Zacks' 7 Best Strong Buy Stocks (New Research Report)
Valued at $99, click below to receive our just-released report predicting the 7 stocks that will soar highest in the coming month.
Image: Bigstock
Lumen Surges 241% YTD: Will the Stock Sustain Momentum in 2025?
Lumen Technologies, Inc’s (LUMN - Free Report) shares have surged 240.9% year to date (“YTD”), outpacing the S&P 500 composite and sub-industry’s growth of 27.3% and 57.3%, respectively.
YTD Price Performance
Image Source: Zacks Investment Research
Closing at $6.23 as of yesterday’s trading session, LUMN stock is currently trading 39.7% below its 52-week high of $10.33 attained on Nov. 11, 2024.
Lumen is a global communications services provider which operates one of the most interconnected networks globally. LUMN stock has been surging amid AI-driven demand for its private connectivity fabric (“PCF”) solutions and other digital offerings. Will the company’s efforts to capitalize on the fiber opportunity bear fruit and propel stock upwards?
Let us dig deeper and find out.
AI Deals Propels LUMN Stock
Increasing demand for Lumen's PCF solutions amid rapid AI proliferation has been emerging as an encouraging development. Lumen has secured an additional $3 billion in incremental PCF deals, bringing the total to $8 billion in new PCF sales since June 2024. As AI surmounts various spheres, large companies across various industries urgently seek fiber capacity, which is becoming highly valuable and potentially scarce.
Lumen has been inking deals with tech giants for its PCF solutions. In November 2024, the company announced a collaboration with Alphabet’s (GOOGL - Free Report) Google Cloud to power proactive data insights and AIOps across its network. Lumen has utilized Google Cloud’s databases, infrastructure, and BigQuery data and analytics platform to create a Lumen Digital Twin for gaining insights across the Lumen network in real time. Alphabet has chosen Lumen to expand network capabilities for Google Cloud to cater to the increasing demand for its services and foster AI innovation.
Before that, Lumen partnered with Amazon (AMZN - Free Report) to boost data center connectivity and enhance network delivery of cloud technologies. The company will leverage Amazon Web Service (“AWS”) tech (including AI and machine learning) to upgrade its applications and systems. In turn, the company will provide fiber connectivity to AWS data centers. This will aid enterprise clients in building and delivering scalable AI applications across AWS local zones and regions.
It teamed up with Meta Platforms (META - Free Report) to elevate the latter’s network capabilities. The expanded network will deliver a dedicated interconnection for Meta's cutting-edge infrastructure.
Increasing demand for Lumen services, particularly for Waves and IP in its large enterprise and mid-market segments remains a highlight. Year to date, IP sales and Wave sales are up 18% and 25% (through September). Lumen also has expanded its high-speed IP service to include 400-gig ports in 14 other markets. 400-gig Waves are available in more than 70 markets. It also has further expansion plans this year.
LUMN Raises Outlook
Lumen raised its free cash flow guidance for 2024, driven by higher cash flows associated with PCF sales growth. For 2024, free cash flow is anticipated to be between $1.2 billion and $1.4 billion. Earlier, the company expected free cash flow in the range of $1-$1.2 billion.
$1 Billion in Cost Cuts for LUMN
Lumen continues to progress with its turnaround and is striving to boost operational efficiency. The company has been anticipating $1 billion in cost savings by the end of 2027 through planned infrastructure simplification across the network, product portfolio and IT. It has been looking to integrate the network across all four different architectures, by engineering them into one simplified standardized network fabric. This integration will also aid in product portfolio simplification. Management expects to significantly reduce the product count from thousands of product codes to a target of nearly 300.
Lumen’s Momentum in Quantum Fiber Business
Continued investments in Quantum Fiber and enterprise business are positives. Lumen anticipates witnessing healthy momentum in the Quantum business in the upcoming quarters. The company added 43,000 Quantum Fiber subscribers, taking the count to 1 million in the reported quarter. In the third quarter, the company added 131,000 Fiber broadband-enabled locations. As of Sept. 30, 2024, the total enabled locations in the retained states were 4 million. The company is targeting to achieve 500,000 enabled locations in 2024.
Improving Estimate Revision Activity
Analysts appear bullish regarding the stock as indicated by upward estimate revisions.
Analysts have improved their earnings estimates for the current quarter to a loss of 8 cents per share compared with a loss of 22 cents per share in the past 60 days. The estimates for the current year have been improved to a loss of 38 cents per share from a loss of 59 cents in the same period.
Image Source: Zacks Investment Research
LUMN’s Discounted Valuation
From a valuation perspective, LUMN is trading at a massive discount. Going by its trailing 12-month price-to-sales ratio, it is trading at a multiple of 0.46, much below the industry’s ratio of 10.65.
Image Source: Zacks Investment Research
Headwinds in the Legacy Business & Higher Costs Ail LUMN
Lumen continues to witness weakness in the legacy business. In the third quarter of 2024, Lumen’s total revenues declined 11.5% year over year to $3,211 million. This decline was due to the negative impact of divestitures, commercial agreements and the sale of the CDN business. As Lumen shifts toward newer growth products like fiber and cloud-based offerings, the secular headwinds in the legacy business will continue to prove a strain on the top-line expansion at least in the near term.
Incremental costs in expanding new business will prove a drag on the margins. For 2024, Lumen continues to expect adjusted EBITDA in the band of $3.9-$4 billion and capital expenditures to be between $3.1 billion and $3.3 billion. Lumen added that given the overall business trends and initial cost impacts from the incremental PCF sales, it expects 2024 EBITDA at the low end of the guided range.
The company continues to expect 2025 EBITDA to be below the levels of 2024, owing to the investments in transformation costs along with higher startup costs for PCF sales and legacy revenue declines. Lumen expects EBITDA to significantly rebound in 2026 and register growth thereafter.
LUMN’s Debt Load Worrisome
LUMN has a debt-heavy balance sheet. As of Sept. 30, 2024, the company had $2.64 billion in cash and cash equivalents with $18.142 billion of long-term debt compared with the respective figures of $1.495 billion and $18.411 billion as of June 30, 2024.
Final Thoughts
A nuanced approach is needed while dealing with LUMN as this stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Though opportunities presented by the rapid proliferation of AI are positive, tight competition in the AI space could prove to be an impediment. Massive debt load and pressured top line remain concerns, despite discounted valuation. Consequently, it might not be a prudent investment decision to bet on the stock at the moment. However, long-term stakeholders and investors already owning the stock could stay put.