Why Lumen Technologies Dropped Today

Shares of Lumen technologies (NYSE: LUMN) fell sharply on Tuesday, down 9.1% as of 2:23 p.m. EDT.

Lumen is a debt-ridden company, and its shares ran into trouble earlier this year. However, a deal early this year to extend its debt maturities, combined with long-term deals for AI (artificial intelligence) networks, sent its shares soaring in early August.

But weeks after the stock’s big run, skeptics are publicly throwing cold water on the company’s AI-powered turnaround prospects. Today, another short seller voiced skepticism about how meaningful these AI deals will really be in addressing the company’s massive debt load. This was the second short seller to issue a note in the past week, adding to broader market fears today, resulting in a big drop.

Hedgeye raises concerns about Lumen’s debt and cash flow

On Tuesday, equity advisory firm Hedgeye published a note advising readers to short Lumen. The note reflected familiar concerns about Lumen’s debt load and declining financial metrics. Hedgeye specifically pointed to Lumen’s high debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of 4.3, along with “limited” free cash flow generation. While noting that the company’s deal to defer debt payments until 2029 gives management more time for a turnaround, the short-seller expressed skepticism that Lumen’s declining core business would turn around in time.

Hedgeye’s short note comes just a week after another short-seller published a report on Lumen in late August, raising similar concerns.

The short sellers alleged that Lumen announced $5 billion in new AI-related deals and another $7 billion in additional AI “opportunities” just one day before the release of its second-quarter results, thereby covering up the ongoing deterioration.

In Q2, Lumen’s business continued to decline, with revenue down 10.7%. Management noted that approximately 36% of that decline was due to divestitures, but the overall business is still down high single digits. Management also highlighted two areas of focus, the enterprise “growth” portfolio, which grew 1.5% year over year, and the consumer fiber-to-the-home product, which grew 14.6%.

The problem is that those growth segments are still a minority of the business, while the bulk of Lumen’s product revenue continues to decline. Lumen also recorded free cash flow of $156 million loss in the quarter. And while management forecast $1.1 billion in positive free cash flow for the year, $700 million of that will come from a one-time tax refund.

The story continues

It is notable that Lumen has debt and pension obligations of approximately $18.9 billion.

Investors should be skeptical about an AI turnaround

Investors may be eyeing Lumen as a value stock given that it was trading at a distressed valuation, but it could also benefit from increased networking spending on AI. Caution is advised, however. The new $5 billion AI-related Private Connectivity Fabric deal will take place over three to four years, according to the company’s quarterly report, and will also require additional spending by Lumen. That’s about $1.25 billion in revenue per year, with uncertain profitability.

That’s compared to the $13.7 billion in revenue Lumen generated over the past 12 months. But these kinds of “new” revenue streams have to replace older technologies that are still in decline, so it’s not like Lumen will grow its revenue by 10% as a result of this deal alone.

In short, Lumen’s turnaround is far from certain, even with its shiny new AI revenue. Investors should therefore be skeptical and read the short-sellers’ reports before considering an investment.

Should You Invest $1,000 in Lumen Technologies Now?

Before you buy Lumen Technologies stock, you should consider the following:

The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Lumen Technologies wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.

Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $731,449!*

Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.

View the 10 stocks »

*Stock Advisor returns as of September 3, 2024

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Why Lumen Technologies Collapsed Today was originally published by The Motley Fool