Is Lumen Stock Heading For Bankruptcy Or Massive Gains?

Lumen Technologies (NYSE:LUMN) is a company that is best known for its extensive wire and cable assets. A key player in the telecommunications sector, Lumen is neither a “sexy” nor a high-growth company, making it a stock that investors have sold heavily during previous market rallies.

In fact, over the past decade, shares of LUMN stock have fallen more than 85% as investors look past the company’s aging infrastructure and declining service appeal to other players with better growth prospects. Additionally, with just under $19 billion in debt on the company’s balance sheet, this is a company that has been hit hard by rising interest rates. For many investors, bankruptcy seemed a likely outcome for the company. That is, until recently.

Year-to-date, LUMN shares are up more than 185% as investors price the company more likely to make it through this difficult period. The interest rate cut from the Federal Reserve is expected to ease the debt burden of companies like Lumen. And it’s important to point out that this is a company that still pulls in about $1.4 billion in free cash flow every year.

So let’s see if the bulls or bears are more likely to be right about this name going forward.

Key points about this article:

• Lumen’s legacy business hasn’t provided much in the way of demand for its stock, which has fallen over the past decade.
• However, the new catalysts could bring more upside for this stock, which is up more than 185% year-to-date alone.
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A new $5 billion business

An image of a woman with a cosmic-like appearance superimposed over her brain

Shares of Lumen Technologies rose on August 6 after the company announced the company secured $5 billion in new business. The telecom giant has announced that it will expand capacity and network capabilities for key customers such as Microsoft to support growing demand from US data center customers. Additional discussions are underway, where Lumen could secure up to $7 billion in AI revenue opportunities. . This could be a very big win for this company considering Lumen’s global market cap is currently around $5.3 billion at the time of writing.

To have this stock priced around 1x forward sales from this announcement (never mind the company’s legacy business) is incredible. And if an additional $7 billion opportunity materializes, this stock could be among the cheapest in the telecom space right now.

Of course, there’s the unpleasant reality that Lumen is still losing money on an EPS basis, and will need to see this future demand trickle down to the bottom line for the stock to see significant gains going forward. But as demand for the company’s next-generation dense fiber cables grows (in addition to demand from AI data centers), even more customers can rely on the company’s robust network infrastructure to handle data flows without precedent that many expect to see.

Strong demand for AI leading to improved outlook?

An illuminated brain on top of a motherboard

In addition to this massive revenue opportunity that the company announced, another key factor driving LUMN stock up was Lumen. better than expected results in Q2 posted on August 7th. The company significantly raised its full-year free cash flow guidance, suggesting the AI ​​revenue it expects to see could materialize in the near term. And while the company posted an EPS loss of 5 cents per share, that was less than most analysts expected, with revenue also down 10.7% (not great, but still not as bad as analysts were forecasting ).

Consequently, investors now seem to see the company as a beneficiary of the growing demand for AI. If Lumen is able to fill a key gap in the market for improved data center connectivity, this is a stock that could be very undervalued at current levels. Much rests on the company’s future growth prospects and transformation into an AI game. But with increasing free cash flow guidance, this is a stock with a free cash flow yield of around 26%, which is starting to look very attractive at current levels.

Lumen has to prove itself

Lumen logo

Given Lumen’s current financial situation, investors may rightfully remain on the fence with this stock. The company is still unprofitable, with a heavy debt load and a balance sheet that needs some work. But if cash flows are above the company’s guidance going forward, and Lumen can show consistent profitability as a result of its major AI investments, this is a stock that could be very undervalued at current levels. Again, I point to the company’s free cash flow yield as a key metric that makes this stock attractive, at least on a fundamental basis, to many investors.

Fiber and cable solutions may not be as attractive as other infrastructure areas of the market for investors to focus on. But for a truly revolutionary AI future to develop, companies will likely need to continue investing in these solutions for some time. Lumen is among the key players in this space and sees strong order demand. If this continues, I think this is a stock that could not only escape bankruptcy concerns, but fly higher from here.

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