Lumen Applied sciences NYSE: LUMN has skilled skyrocketing share value within the final month, making it one of many top-performing shares primarily based on complete 30-day returns within the space of 323% as of this writing. Earlier this month, Lumen shares topped $6 for the primary time since late 2022. All of this momentum has drawn investor consideration to this legacy telecommunications infrastructure agency, as soon as written off for struggling to adapt to fast shifts in communications know-how.

Is the rally justified? Taken as a gaggle, analysts do not imagine so, no less than to not the diploma seen in current weeks. A mean value goal of $3.74 is a full 38% decrease than the present inventory value, suggesting analysts count on Lumen to reverse course sharply. Taking inventory of each the bullish and bearish views on Lumen could assist present retail buyers with much-needed perspective earlier than deciding to take a position on this firm.

Lumen’s AI Focus and Microsoft Deal Sign Future Progress

A lot of the thrill round Lumen pertains to newfound AI potential, maybe finest encapsulated by final month’s announcement of a partnership with Microsoft Corp. NASDAQ: MSFT during which Lumen will help the tech large’s information middle growth efforts. In addition to probably resulting in billions in money stream, the Microsoft settlement has reframed Lumen as an organization poised to ship key AI infrastructure to legions of corporations trying to additional combine this tech into their enterprise fashions.

Though in a roundabout way impacted by the monetary element of the Microsoft settlement, Lumen’s latest quarterly report additionally offers some causes for optimism. Income was slightly below $3.3 billion, down year-over-year however forward of analyst predictions. Adjusted EBITDA was additionally down by over $200 million, however the agency raised its full-year steerage on this space alongside a elevate in anticipated free money stream. Each of those are constructive indicators that the AI growth may have a tangible profit for Lumen.

Lumen Faces Debt Challenges Regardless of Microsoft Partnership

The Microsoft partnership has drawn headlines, however digging deeper reveals that Lumen nonetheless faces a tricky street forward regardless of a possible second life as an AI infrastructure firm.

As of the second quarter, Lumen’s long-term debt totaled $18.4 billion, down barely year-over-year. Although carrying debt is not essentially a foul factor, Lumen lacks a transparent path out of this place. Its legacy telecom companies are faltering, and a large-scale shift towards AI would doubtless require expensive progress initiatives that would make the issue worse.

Lumen’s newest quarterly report once more, web losses narrowed considerably. Nonetheless, they constituted a shift away from web positive aspects in 2023 when accounting for an $8.8-billion non-cash goodwill impairment cost final yr. Analysts anticipated web losses within the second quarter of 2024, however diluted losses per share of 13 cents have been extra important than the 6 cents they anticipated.

On a extra granular degree, lots of Lumen’s enterprise traces have struggled within the final yr, with Giant Enterprise, Mid-Market Enterprise, North America Enterprise, Wholesale, and Worldwide gross sales all down year-over-year.

Hassle with legacy companies might be partially written off if Lumen had a transparent public timeline for when it’ll see a money inflow from the Microsoft deal and different AI efforts. At this stage, nevertheless, there may be little to verify to buyers that these ventures will have the ability to pay down a big chunk of Lumen’s debt load this yr or any time quickly after that. Along with the affect of excessive rates of interest in current quarters, Lumen’s debt considerations have develop into even harder to handle.

Lumen’s Rally Fueled by Hypothesis?

Lumen inventory has quadrupled because the firm’s July 24 announcement of its partnership with Microsoft. Primarily based on the elements above, it seems that a considerable driver of this rally is investor hypothesis that the deal indicators a newly worthwhile path ahead for the corporate with a historical past extending again nearly 100 years.

Although there are causes to be bullish on Lumen inventory, the warning indicators are important and more likely to stay except there are different elementary modifications for the corporate on the horizon.

Finally, whilst Lumen shares proceed their stratospheric ascent, buyers nonetheless have purpose to think about this firm cautiously earlier than shopping for in.

Whereas Microsoft presently has a “Average Purchase” ranking amongst analysts, top-rated analysts imagine these 5 shares are higher buys.

View The 5 Shares Right here

Like this text? Share it with a colleague.

Hyperlink copied to clipboard.