How Lumen transformed from a 99-cent stock into the latest AI craze

By Emily Bary

One analyst notes 'a legitimate uplift in demand for fiber infrastructure to support the growth in AI' - but short covering is likely also at play with shares up 500% in a month

A year ago, Lumen Technologies Inc. faced a looming debt tower and the prospect of a bruising battle with creditors over its maturities. During one session this June, its stock closed at 99 cents.

But now the fiber and telecommunications company is hot, thanks to networking deals with companies including Microsoft Corp. (MSFT) that offer a cash infusion and allow the company to benefit from the hefty budgets being thrown around for artificial-intelligence infrastructure. Lumen's (LUMN) recent momentum has helped send its stock soaring, which in turn has short sellers likely scrambling to cover their positions.

Lumen shares are up 500% over the past month, with "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," according to MoffettNathanson analyst Nick Del Deo.

Earlier this week, Lumen announced that it's won $5 billion in new business related to artificial intelligence, while saying it's in talks for $7 billion more. On Tuesday afternoon, the company projected at least $1 billion in free cash flow for the year, well above its prior forecasts, as the deals come with sizable upfront cash collection.

"The revenue bleeds in over a much longer timeframe, but that cash allows us to fund the transformation, it allows us to pay down debt and start to attack the debt structure," Chief Financial Officer Chris Stansbury said on the company's earnings call.

Lumen shares ended Wednesday's session up 33%. On the year, they're up 250%, more than doubling the gains seen by Nvidia Corp. (NVDA) over that period.

Of course, for Lumen, this year's rally comes after a protracted fall. The company, once known as CenturyLink, operates legacy telecommunications businesses including voice and ethernet that face secular pressures. Even with the latest action, shares are down more than 85% from their all-time high seen in 2007.

Some of Lumen's recent stock gains reflect short covering, according to analysts, as the company had become a popular bearish bet. Short sellers have been gradually cutting back their positions since the middle of May and likely have been "unwinding rapidly over the past two days of trading on the back of the stock price surging," said Matthew Unterman, a managing director with S3 Partners.

Short sellers were staring down paper losses estimated at half a billion dollars, he added.

While there is real money around Lumen's AI potential, some analysts see reason to temper the enthusiasm. "We need to balance this AI-driven opportunity against other stiff challenges facing Lumen," Del Deo wrote. These include pressures on the commercial wireline market, revenue declines in legacy business areas and $19 billion in gross debt, he said.

The company announced a debt-restructuring deal back in January.

"Lumen's AI-driven fiber deals unquestionably provide substantial value to the company," Del Deo wrote. "Still, even after giving the company significant credit for them, along with improving revenue trends in the rest of its business and a better expense outlook, we struggle to justify the current stock price."

All the while, he acknowledged that Lumen shares are "likely to trade on the AI narrative rather than long-term fundamentals for some time."

TD Cowen's Gregory Williams wrote that the funding from these deals "admittedly provides much relief for a company that was facing serious liquidity issues," though he doubted the arrangements would prove a "game changer" for the company's financials.

"While these deals look sizable...they may not move the needle much" on revenue, earnings or recurring free cash flow, he wrote.

Lumen's management, though, is upbeat about the opportunity. "We see a runway to growth as we transform telecom, and we believe this sets up a value-creation path for Lumen," Stansbury said on the earnings call.

-Emily Bary

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08-10-24 0902ET

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