The Rise of Lumen From a 99-cent Stock to the Latest Craze in Ai

A year ago, Lumen Technologies Inc. was grappling with a massive debt burden and the daunting prospect of contentious negotiations with creditors over upcoming maturities. At one point this past June, its stock plummeted to just 99 cents per share.

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Fast forward to now, and the fiber and telecommunications company has experienced a dramatic turnaround, thanks largely to networking deals with major corporations, including Microsoft Corp. These agreements have provided a significant cash influx and positioned Lumen to capitalize on the substantial budgets being allocated for artificial intelligence (AI) infrastructure. This newfound momentum has caused Lumen's stock to skyrocket, likely forcing short sellers to rush to cover their positions.

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Over the past month, Lumen's shares have surged by an astounding 500%. According to MoffettNathanson analyst Nick Del Deo, this dramatic rise reflects "the market waking up to the idea that there has been a legitimate uplift in demand for fiber infrastructure to support the growth in AI data centers."

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Earlier this week, Lumen announced that it had secured $5 billion in new business related to AI, with discussions underway for an additional $7 billion. On Tuesday afternoon, the company projected at least $1 billion in free cash flow for the year, significantly exceeding its previous forecasts. This surge in cash flow is driven by the upfront payments associated with these deals.

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Chris Stansbury, Lumen's Chief Financial Officer, explained during the company's earnings call that while the revenue from these deals will be realized over a more extended period, the immediate cash flow enables the company to fund its transformation, pay down debt, and begin addressing its debt structure.

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As a result of these developments, Lumen's shares jumped 33% by the close of trading on Wednesday. Year-to-date, the stock has soared by 250%, outperforming even Nvidia Corp., which has also seen impressive gains this year.

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However, it's important to note that Lumen's recent rally comes after a long period of decline. Formerly known as CenturyLink, the company operates legacy telecommunications businesses, including voice and ethernet services, that are facing ongoing secular challenges. Despite the recent surge, Lumen's shares remain more than 85% below their all-time high reached in 2007.

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According to analysts, part of Lumen's recent stock gains can be attributed to short covering, as the company had become a popular target for bearish bets. Matthew Unterman, a managing director with S3 Partners, noted that short sellers have been gradually reducing their positions since mid-May. However, with the stock's recent surge, they likely accelerated their unwinding over the past two days of trading. Unterman estimated that short sellers were facing paper losses of around half a billion dollars.

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While there is genuine excitement around Lumen's potential in the AI space, some analysts caution against getting too carried away. Del Deo, the MoffettNathanson analyst, emphasized the need to balance this AI-driven opportunity with the other significant challenges Lumen faces. These include ongoing pressures in the commercial wireline market, declining revenues in its legacy business areas, and a substantial $19 billion in gross debt.

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Lumen had announced a debt-restructuring agreement back in January to address some of these financial challenges. Despite the promising AI-driven fiber deals, Del Deo expressed skepticism about whether these developments could fully justify the current stock price. He acknowledged that while the deals undoubtedly add value to the company, Lumen's shares are likely to be influenced more by the AI narrative than by long-term fundamentals for the foreseeable future.

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Similarly, TD Cowen's Gregory Williams noted that while the cash infusion from these deals provides much-needed relief for a company facing serious liquidity issues, he questioned whether these arrangements would be a "game changer" for Lumen's financial outlook. Williams argued that although the deals appear substantial, they might not have a significant impact on revenue, earnings, or recurring free cash flow.

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Despite these reservations from analysts, Lumen's management remains optimistic about the future. During the earnings call, Stansbury expressed confidence in the company's growth prospects, stating, "We see a runway to growth as we transform telecom, and we believe this sets up a value-creation path for Lumen."

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Overall, while Lumen's recent performance has provided a much-needed boost to its stock and alleviated some immediate financial pressures, the company still faces significant hurdles. The long-term success of Lumen will depend on its ability to navigate these challenges and capitalize on the opportunities presented by the rapidly evolving AI landscape.

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