Lumen Applied sciences NYSE: LUMN has skilled skyrocketing share worth within the final month, making it one of many top-performing shares primarily based on whole 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 speedy shifts in communications expertise.

Is the rally justified? Taken as a gaggle, analysts do not consider so, at the least to not the diploma seen in current weeks. A mean worth goal of $3.74 is a full 38% decrease than the present inventory worth, suggesting analysts anticipate 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 speculate on this firm.

Lumen’s AI Focus and Microsoft Deal Sign Future Progress

A lot of the joy round Lumen pertains to newfound AI potential, maybe finest encapsulated by final month’s announcement of a partnership with Microsoft Corp. NASDAQ: MSFT through which Lumen will help the tech large’s information middle growth efforts. In addition to doubtlessly 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 just 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 steering on this space alongside a elevate in anticipated free money stream. Each of those are optimistic indicators that the AI increase might 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 troublesome highway 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 nasty factor, Lumen lacks a transparent path out of this place. Its legacy telecom companies are faltering, and a large-scale shift towards AI would probably require pricey progress initiatives that would make the issue worse.

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

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

Bother with legacy companies could possibly be partially written off if Lumen had a transparent public timeline for when it’s going to see a money inflow from the Microsoft deal and different AI efforts. At this stage, nonetheless, there’s 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 influence of excessive rates of interest in current quarters, Lumen’s debt considerations have turn out to be even more durable to handle.

Lumen’s Rally Fueled by Hypothesis?

Lumen inventory has quadrupled for the reason that 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 virtually 100 years.

Although there are causes to be bullish on Lumen inventory, the warning indicators are vital and more likely to stay except there are different elementary adjustments 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 “Reasonable Purchase” ranking amongst analysts, top-rated analysts consider these 5 shares are higher buys.

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