After several years of underperformance, Lumen Technologies (LUMN) has staged a spectacular comeback amid the artificial intelligence (AI) boom, rising 181% since the start of 2024. However, the rally has been derailed in recent sessions by a short seller report, driving the stock lower by 18% so far this week.
Today, Lumen Technologies is valued at a market cap of $5.43 billion, and the stock trades over 89% below all-time highs. Let’s see if this week's pullback provides investors with a buying opportunity on this AI stock.
Lumen Technologies Gains After Q2 Results
Lumen Technologies provides integrated communications to residential and business customers. It has two primary business segments that include Business, which provides products and services under four channels to enterprise and commercial customers; and Mass Markets, which focuses on consumer and small business customers.
In Q2 of 2024, Lumen Technologies reported an adjusted loss of $0.13 per share on sales of $3.27 billion. Comparatively, Wall Street forecast revenue at $3.25 billion and net losses at $0.04 per share. Its sales fell by more than 10% year over year, while it reported earnings of $0.10 per share in the year-ago quarter.
Despite the earnings miss, LUMN stock surged over 30% in a single trading session following its Q2 results, as investors were impressed with the company’s forward guidance.
Lumen projected full-year free cash flow between $1 billion and $1.2 billion in 2024, much higher than its earlier guidance of between $100 million and $300 million. This means that the tech stock trades at 5 times forward cash flow, which is really cheap.
Investors were also excited after Lumen claimed it won new fiber deals worth $5 billion, with an additional $7 billion worth of contracts in the pipeline. Notably, Lumen has partnered with Microsoft (MSFT) to expand the tech giant's data center capacity, making it part of the AI megatrend.
While Lumen stock has delivered massive returns in 2024, it ended Q2 with a debt balance of $19 billion. Moreover, the company will have to spend heavily on capital expenditures to service these big-ticket contracts, which means it will need to shore up its cash flow margin.
Kerrisdale Capital Tears into Lumen Technologies
On Aug. 27, short seller Kerrisdale Capital published a research report that raised several concerns about Lumen Technologies. It accused Lumen of fueling a dramatic turnaround story on the back of the AI megatrend, even as it continues to operate a declining business with significant debt.
The research report stated, “Incredibly, Lumen, a company with a long history of disappointing investors and which just reported EBITDA down -13%, is now trading in line with telecom peers with healthy growth outlooks, lower leverage, and attractive dividends. We understand the allure of trying to find the next great AI play, but at these levels, an investment in Lumen lacks more than just artificial intelligence.”
According to Kerrisdale Capital, Lumen’s $5 billion deal will net less than $1 billion and generate $21 million a year in recurring profit for operations and maintenance, which is insufficient to solve its balance sheet issues. Lumen’s core business revenue was down 8.6% in Q2, the worst decline in company history.
Finally, Kerrisdale Capital explained that Lumen’s software applications remain uncompetitive compared to peers, forcing it to lose market share to new and legacy players.
What is the Target Price for LUMN Stock?
Notably, the short seller report echoes similarly skeptical remarks from sell-side analysts on Wall Street, who have noted that LUMN's recent AI-driven gains should be weighed against the expected timeline of its financial turnaround.
Out of the 10 analysts covering LUMN stock, seven recommend “hold,” one recommends “moderate sell,” and two recommend “strong sell,” for an overall consensus of “hold."
Plus, the average target price for LUMN is $3.74, about 27.5% below the stock's current price.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
