Lumen Technologies stock is up nearly 500% in less than 2 months. Is it time to buy?

After years of decline and fears of bankruptcy, the tide may have turned for the beleaguered telco. Lumen Technologies (LIGHT -14.54%). The stock has suffered due to its aging infrastructure and lack of attractive service offerings. Also, with nearly $19 billion in debt and ongoing financial struggles, its long-term survival has been called into question.

Fortunately, relief could come thanks to artificial intelligence (AI). The company’s extensive network positions it to provide connectivity between 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.

Status of Lumen Technologies

Before this partnership, it seemed like the tech world had passed Lumen over. The company was best known for its extensive network of wire and cable assets. Investors increasingly ditched its services, and a stock that topped $45 a share in 2011 briefly traded below $1 a share in early summer 2024.

As demand for such services has waned, it has promoted networking, cybersecurity, collaboration and leading-edge solutions, but these efforts have failed to stem revenue declines.

In the first half of 2024, revenue of $6.6 billion was down 11% from the same period last year. Lumen was able to reduce operating expenses, resulting in modest operating income and a profit of $8 million in the first six months of the year. However, since this included a $49 million loss in the second quarter, it was not clear that Lumen had stopped its losses for good.

what changed

However, Lumen has just struck a deal that could bring a dramatic break from his past partner Microsoft. The company’s private connectivity factory will expand Microsoft’s data center capacity, while Azure will accelerate a digital transformation at Lumen by leading 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. Lumen also announced that it has secured approximately $5 billion in new business fueled by growing demand for AI. In addition, another deal with Blue Planet, a division of Cienawill contribute to consolidating its legacy systems, streamlining service delivery and digitizing network assets.

Effects on Lumen as a company

At the time of writing, such offers have driven Lumen’s share price up nearly 500% since early July. As a result, the stock is trading at more than $6 per share at the time of writing, pushing it above penny stock status for the first time in more than a year.

Despite these gains, investors shouldn’t necessarily be in a rush to buy. First, the company needs to address its $19 billion in debt, which remains a challenge given Lumen’s market cap of just over $6 billion.

Moreover, while revenue is likely to increase, it remains unclear how it will affect its financial transactions. The deals with Corning and Ciena are added capital expenditures, meaning Lumen will have to spend significantly to secure this business. So investors will have to wait for future earnings reports to see how much Lumen’s offerings help.

Should investors buy?

Given 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 telecommunications industry. As a critical part of the AI ​​infrastructure, Lumen can avoid a possible bankruptcy that seemed increasingly likely until a few weeks ago. Given this upside potential, the share price rally is understandable.

However, it is unclear whether excitement over the deals or the prospect of improving financials is driving the telecom stock higher. For now, it remains unknown how the increased capital spending will affect the company’s heavy debt burden.

Investors also don’t yet know whether the deals will bring sustained profitability and the ability to win more business and hopefully reduce debt. Until the company or its results answer these questions, investors should probably watch Lumen stock instead of buy it.