Lumen Technologies (NYSE: LUMN), the telecom company formerly known as CenturyLink, seemed to be in dire straits just a few years ago. Its revenue was declining, it was racking up steep losses, and it suspended its dividend in 2022.
But over the past 12 months, Lumen's stock soared 374% as a new AI infrastructure deal with Microsoft breathed fresh life into its business. Could those tailwinds propel its stock even higher over the next year?
Lumen is one of the largest wireline service providers in the United States. Unlike AT&T and Verizon, which expanded their wireless networks to reduce their dependence on wireline connections, Lumen shunned the wireless market and expanded its wireline business through a series of mergers and acquisitions.
Lumen expected to generate slow but steady growth as economies of scale kicked in. It also expanded its faster fiber networks and bundled more cloud, security, and collaboration services into its business wireline plans.
Lumen's smaller fiber business grew, but that growth was offset by the persistent decline of its business wireline segment. As a result, its annual revenue fell for the past five consecutive years. Over the past two years, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins shrank and it racked up steep losses.
Metric |
2020 |
2021 |
2022 |
2023 |
---|---|---|---|---|
Total Revenue |
$20.71B |
$19.69B |
$17.48B |
$14.56B |
Revenue Growth |
(4%) |
(5%) |
(11%) |
(17%) |
Adjusted EBITDA Margin* |
41.8% |
42.9% |
39.2% |
31.8% |
Net Income (Loss) |
($1.23B) |
$2.03B |
($1.55B) |
($10.30B) |
That's why Lumen's stock dropped below $1 this June. But in July, its stock soared after Microsoft, which owns Azure, the world's second largest cloud infrastructure platform, signed a new networking and fiber deal with Lumen. Through that partnership, Lumen will upgrade Azure's infrastructure to support the future growth of its cloud and AI services. Lumen also signed a deal with Corning to secure a steady supply of fiber optic cables for those sweeping upgrades.
In early August, Lumen claimed it had secured $5 billion in new contracts (including the Microsoft deal) related to the AI connectivity market. It also said it was in "active discussions" to "secure another $7 billion in sales opportunities" and would aim to "more than double its intercity network miles over the next five years."
Based on those statements, Lumen could potentially generate $5 to $12 billion in revenue over the next five years ($1 to $2.4 billion annually) from its new AI-related contracts. That would be equivalent to 7% to 16% of its revenue in 2023, but it's unclear if those tailwinds can fully offset the secular decline of its non-AI business wireline segment.
Analysts expect Lumen's revenue to decline 11% to $13 billion in 2024, followed by a milder 4% dip to $12.4 billion in 2025 as the macro environment warms up, it expands its fiber business, and it recognizes more revenue from its AI contracts.
However, Lumen plans to "pull forward" some of its planned spending for 2026 and 2027 to 2025 to fulfill those new AI data center deals. As a result, it expects its adjusted EBITDA to decline from $4.6 billion in 2023 to $3.9 to $4 billion in 2024. Analysts expect its adjusted EBITDA to drop to $3.9 billion in 2024 and slip to $3.7 billion in 2025.
Those lackluster expectations indicate Lumen's business won't experience a rapid recovery over the next year. It's also still saddled with $18.4 billion in long-term debt and a staggering debt-to-equity ratio of 70. However, it expects its new contracts to boost its free cash flow (FCF) from negative $878 million in 2023 to positive $1 to $1.2 billion in 2024. It also still had $1.5 billion in cash and equivalents at the end of its latest quarter.
Lumen won't go bankrupt anytime soon, and its stock still looks undervalued relative to its peers. With an enterprise value of $23.4 billion (which includes all of its long-term debt), it trades at just 1.8 times this year's sales and 6 times its adjusted EBITDA. By the same measure, AT&T and Verizon trade at 6.3 and 6.8 times this year's sales, respectively.
Yet Lumen's stock can only be considered cheap if it actually grows its revenue, keeps its FCF positive, and turns profitable again. We probably won't know if it can achieve all of those goals within the next four quarters.
So for now, I expect Lumen's stock to mainly trade on the short-term news regarding its AI-oriented businesses and the broader AI market. Its downside potential might be limited by investors' hopes for its future growth, but its upside potential could also be capped by concerns about its persistent losses, shrinking margins, and high debt. Therefore, I still expect Lumen's stock to trade sideways and likely underperform its more profitable industry peers over the next year.
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Leo Sun has positions in AT&T. The Motley Fool has positions in and recommends Microsoft. The Motley Fool recommends Corning and Verizon Communications and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.