Lumen Technologies, Inc.’s LUMN shares have tanked 34.1% in the past month, much wider than the S&P 500 composite and the Technology Services industry’s declines of 9.9% and 9.7%, respectively.

Price Performance

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The indices have been affected by the escalating tariff and trade tensions between the United States and other countries, especially China. Expectations of supply chain disruptions and associated inflationary pressure and a possible global recession are keeping investors on edge, leading to broader market sell-off. LUMN has not remain unscathed with the stock losing 19% since April 2.

Lumen also underperformed some of its peers, such as Verizon Communications VZ, AT&T T and T-Mobile US, Inc. TMUS, which have registered declines of 9.3%, 3.3% and 7.6% respectively. Since April 2, Verizon, AT&T and T-Mobile have lost 5.7%, 6.2% and 6.9%, respectively.

Apart from macro factors, company-specific factors like legacy business woes and heavy debt are also a concern for investors. The stock witnessed a sharp rally in 2024 owing to a pivot to AI. Its recent volatility raises questions about its future trajectory. Let’s discuss the stock’s pros and cons and explore whether this dip signals caution or opportunity for investors.

Legacy Business Woes & Higher Costs Concerns for LUMN

Lumen continues to witness weakness in the legacy business. In the fourth quarter of 2024, the company’s total revenues declined 5.3% year over year to $3,329 million. Nearly 25% of the 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.

For 2025, Lumen expects adjusted EBITDA in the band of $3.2-$3.4 billion and capital expenditures to be between $4.1 billion and $4.3 billion. EBITDA in 2025 is expected to be below the levels of 2024, owing to the investments in transformation and costs, along with higher startup costs for PCF sales and legacy revenue declines. Lumen expects EBITDA to significantly rebound in 2026 and be more than $3.5 billion. It also anticipates that the metric will register growth thereafter. Higher Capex expectations are mainly due to the costs of executing the signed PCF contracts. Free cash flow is expected to be between $700 million and $900 million compared with 1.386 billion in 2024.

LUMN’s Heavy Debt Worrisome

Though Lumen repaid $1.6 billion of overall debt in 2024 and sent redemption notices for another $200 million recently, it still has a very debt-heavy balance sheet. As of Dec. 31, 2024, the company had $1.889 billion in cash and cash equivalents with $17.494 billion of long-term debt compared with the respective figures of $2.64 billion and $18.142 billion as of Sept. 30, 2024.

Pivot to AI Emerges as Main Catalyst for LUMN

Increasing demand for Lumen's Private Connectivity Fabric (PCF) solutions amid rapid AI proliferation is emerging as an encouraging development. Lumen has secured a total of $8.5 billion in PCF deals in 2024.

As AI needs surge, large companies across various industries are urgently seeking fiber capacity, which is becoming highly valuable and potentially scarce. Lumen has inked deals with various tech giants like Microsoft, Amazon, Google Cloud and Meta Platforms to provide the network capabilities for AI innovation. Increasing demand for Lumen services, particularly for Waves and IP in its large enterprise and mid-market segments, remains a highlight. IP sales and Wave sales are up 13% each within North America’s enterprise channels.

In 2024, Lumen 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 witnessed a nearly 50% increase in 100 and 400-gig wave sales across large enterprises and mid-markets in 2024. Lumen aims to grow its total inter-city fiber miles from 12 million in 2022 to 47 million by 2028.

LUMN is focusing on expanding its network capacity while simultaneously increasing the utilization of existing infrastructure. It expects to increase the overall network utilization from 57% in 2022 to 70% in 2028. The increase in utilization is fueled by growing demand from hyperscalers, which are leasing previously underutilized conduits and funding new network builds.

Efforts to Boost Quantum Business Bodes Well for LUMN

The continued investments in Quantum Fiber and enterprise business are encouraging. Lumen anticipates healthy momentum in the Quantum business going forward as it plans to launch Quantum Fiber quote-to-cash network architecture to customers in late 2025. The company added 42,000 Quantum fiber subscribers, taking the count to 1.1 million in the fourth quarter of 2024. Lumen added 105,000 Fiber broadband-enabled locations. As of Dec. 31, 2024, the total enabled locations in the retained states were 4.16 million. The company is targeting to achieve 500,000 enabled locations in 2025.

Lumen’s strong network capabilities and integrated hosting and network solutions are likely to promote growth in the cloud business. Its managed and cloud services are key differentiators from other players in the market. Lumen highlighted that it has more than 500 customers currently using its Network-as-a-Service (NaaS) services.

LUMN Focuses on Cost-Containment

Lumen continues to progress with its turnaround and is striving to boost operational efficiency. The company anticipates $1 billion in cost savings by the end of 2027 through planned infrastructure simplification across the network, product portfolio and IT. It is 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. In the current year, it expects more than $250 million of run-rate cost benefits.

LUMN’s Compelling 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 0.24, much below the Technology Services industry’s ratio of 3.46.

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In comparison, Verizon, AT&T and T-Mobile are trading at multiples of 1.32, 1.56 and 3.51 of compared with the Wireless National Industry’s multiple of 2.30.

Conclusion: Hold LUMN for Now

Lumen is navigating a transformative period, aligning itself with the massive growth of AI, cloud computing and digital telecom services. Increasing PCF demand and deals with tech giants are creating a strong foundation for future growth. Expansion into NaaS markets is an additional tailwind. Extensive cost cuts and discounted valuation make LUMN a compelling investment opportunity.

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. Lumen is trading below the 50-day and 100-day moving averages, implying that analysts retain a bearish sentiment for the stock. 

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Analysts have kept earnings estimates for LUMN for 2024 and 2025 unchanged over the past 60 days.

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Consequently, it might not be a prudent investment decision to bet on the stock at the moment, which carries a Zacks Rank #3 (Hold). For new investors, waiting for a better entry could offer a more attractive opportunity to invest in this stock.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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