Lumen Technologies, Inc. (NYSE:LUMN), the telecommunication giant that was previously known as CenturyLink, unveiled a new network interconnection ecosystem in collaboration with Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc. (NASDAQ:GOOGL) on June 12 in a bid to fuel its turnaround efforts. Lumen also launched a new quantum fiber broadband service on June 12, which is now available in 18 cities across the United States.
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These efforts are part of Lumen’s strategy to reignite growth, but the market reaction to these positive developments has been muted. I am bearish on the prospects for Lumen, as a turnaround does not seem likely in the foreseeable future.
The New Beginnings with Microsoft and Google
In partnership with Microsoft and Google, Lumen announced a new network interconnection ecosystem named ExaSwitch, which allows companies with high bandwidth requirements to route their traffic efficiently between networks without the need for a third-party service provider. ExaSwitch will enable network interconnections without needing a physical location to connect, even for very large data traffic volumes.
Amid the global digitalization drive, network interconnection ecosystems will play a key role in helping companies, Internet service providers, cloud service providers, and content delivery networks connect seamlessly, enabling data exchange with minimal latency.
Other use cases of network interconnection ecosystems include peering, high-capacity content delivery, and cloud connectivity. ExaSwitch enables participants to connect to networks on a need-to-use basis, and this self-service platform seems well-positioned to gain traction in the coming years as organizations look for ultra-fast interconnectivity solutions.
Challenges Faced by Lumen
Although the launch of ExaSwitch improves Lumen’s long-term profitability profile, the company still needs to overcome many challenges to successfully turn its prospects around.
First, Lumen has to generate sufficient cash flows to service its massive debt pile. At the end of the first quarter, Lumen had $19.7 billion in long-term debt. In 2022, the company reported operating cash flows of $4.73 billion – which looks good on paper – but it incurred interest expenditures of $1.36 billion to service debt. Although there are no significant debt maturities until 2027, Lumen will have to reassure investors of its capability to reduce this debt pile by improving its operating margins and bringing in more operating cash flows. Failure to do this will result in continued underperformance of its stock.
Second, the company will be forced to invest millions of dollars each year to keep up with the rapid pace of technological advancements. The aggressive rollout of 5G and the increasing adoption of cloud computing have already forced Lumen to invest substantial amounts of money to develop its network infrastructure.
These investments are necessary to retain its market share, but at the same time, substantial R&D expenses will hurt the short-term profitability of the company. Lumen has so far struggled to strike a balance between investing for the long term and maintaining a clean balance sheet. Failure to overcome this challenge may push Lumen into bankruptcy in the future.
Third, the company will have to thwart competitive threats to secure its market position in the long term. The newly-launched quantum fiber Internet service is a step in the right direction to stand out from its competitors, but the company still lacks clear competitive advantages for its consumer business, which still accounts for a fifth of annual revenue.
The enterprise business, which forms the backbone of the company, is facing challenges because of the decline in voice and private network usage. Technological advancements are driving business customers away from these products, making it difficult for Lumen to earn the expected return from its past investments in these legacy products.
Is Lumen Stock a Buy, According to Analysts?
Based on the ratings of 10 Wall Street analysts, the average Lumen Technologies stock price target is $8.18, which implies upside potential of 311% from the current market price.
This consensus estimate suggests Lumen is deeply undervalued today, but investors need to consider the dire financial situation Lumen has found itself in before jumping on board. Investing in Lumen today carries substantial risks and will only be suitable for investors who are comfortable with losing the entire value of their investment in the worst-case scenario if the company fails to gain traction with its new business strategy.
Takeaway: Lumen’s Future Hangs by a Thread
Lumen’s newly-appointed leadership team has unveiled new products and strategies to reignite growth and steer the company in the right direction. Although these efforts are commendable, Lumen is still not out of the woods, and the company has a long way to go before getting to a position where it can focus on aggressively pursuing the growth opportunities available in the telecommunication sector. In the foreseeable future, Lumen’s primary focus will be surviving the current challenges to live another day, which is not an encouraging proposition for growth investors.
