The controversial fiber and copper-network owner was the target of a short report, the second on the company within a week.
Shares of Lumen Technologies (LUMN -10.29%) were falling hard on Tuesday, down 9.1% as of 2:23 p.m. EDT.
Lumen is a debt-riddled company whose stock became distressed earlier this year. However, an early-year deal to extend its debt maturities, combined with long-term deals for AI (artificial intelligence) networking, caused the stock to skyrocket in early August.
But weeks after the stock’s big pop, skeptics are publicly throwing cold water on the AI-fueled turnaround prospects. Today, another short-seller voiced skepticism as to how meaningful those AI deals will really be in tackling the company’s massive debt load. This was the second short-seller to publish a note in just the past week. That added to general market fears today, resulting in a big drop.
Hedgeye raises concerns about Lumen’s debt and cash flow
On Tuesday, stock-recommendation firm Hedgeye published a note advising readers to short Lumen. The note reflected familiar concerns over Lumen’s debt load and declining financial metrics. Specifically, Hedgeye pointed to Lumen’s high debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 4.3, along with “limited” free-cash-flow generation. While noting the company’s deal to push out its debt maturities to 2029 gives management more time for a turnaround, the short-seller voiced skepticism that Lumen’s declining core business would turn around in time.
Hedgeye’s short note comes just one week after another short-seller published a report on Lumen at the end of August, which voiced similar concerns.
The short-sellers posited that Lumen disclosed $5 billion in new AI-related deals and an additional $7 billion in additional AI “opportunities” just one day before releasing second-quarter results in order to paper over continued deterioration.
In Q2, Lumen’s business continued to decline, with revenues down 10.7%. Management did note that about 36% of that decline was related to divestitures, but the overall business is still showing a high-single-digit decline. Management also highlighted two areas of focus, its “growth” portfolio for enterprises, which grew 1.5% year over year, and its fiber-to-the-home consumer product, which grew 14.6%.
The problem is those growth segments still make up a minority of the business, while the majority of Lumen’s product revenue continues to deteriorate. Lumen also recorded a $156 million free-cash-flow loss in the quarter. And while management guided for $1.1 billion in positive free cash flow this year, $700 million of that will be due to a one-time tax refund.
Of note, Lumen has about $18.9 billion in debt and pension liabilities.
Investors should be skeptical of an AI turnaround
Investors may be eyeing Lumen as a value stock, given that it traded at a distressed valuation but may also benefit from increased network spending on AI. However, one should remain cautious. The new $5 billion AI-related Private Connectivity Fabric deal will occur over three to four years, per the company’s quarterly report, and will also entail extra spending by Lumen. That’s about $1.25 billion in revenue per year, with uncertain profitability.
That’s in relation to the $13.7 billion in revenue Lumen made over the past 12 months. But these types of “new” revenue sources have to replace older technologies that are still declining, so it’s not as if Lumen will grow its top line 10% as a result of this deal alone.
The bottom line is, Lumen’s turnaround is far from assured, even with its shiny new AI revenue. Investors should therefore be skeptical and read the short-sellers’ reports before considering an investment.
Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
