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Is it too early to call Lumen (NYSE: LUMN) the next meme stock? The company saw its share blast off an incredible 93% during trading hours today and is now up another 50% after hours.
That's right, after closing for $2.59 per share yesterday, Lumen shares are now trading hands for more than $7.78 as of 5:30 p.m. ET. Let's dive deeper into what's going on.
Need to Know News
- You can probably guess what's driving Lumen's shares: hype around artificial intelligence. The company has recently traded for less than $1 per share as fears around bankruptcy plagued the company. Yet, today Lumen issued a press release announcing $5 billion in new business fueled by AI.
- Then after-hours the company released earnings that gave a full-year outlook of $3.9 to $4.0 billion in EBITDA and $1.0 to $1.2 billion in free cash flow. That outlook was enough to cause another after-hours frenzy.
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The Background on Lumen
Lumen is a communications company offering a broad suite of services. While the company has both residential and business services, about 80% of its revenues come form its business segment.
Lumen has attracted investor interest because of its low value relative to the company's size. At its low point, the company traded for less than $1 billion in market capitalization despite producing $14.1 billion in revenue and $3.7 billion in EBITDA. How could Lumen have gotten so cheap?
Well, the answer is the company is suffering under a crushing debt load. Coming into its most recent quarter, Lumen sported $1.6 billion in cash & short-term assets against $18.9 billion in total debt. That debt-load has made it tough for the company to turn a profit. In 2019 the company had $6.7 billion in operating cash flow and $3.6 billion in capital expenditures.
With free cash flow of around $3 billion, Lumen could afford to pay the $2 billion in cash interest it owed that year. However, revenue has steadily declined in recent year, which has taken a toll on Lumen. In 2023, the company had operating cash flow of $2.2 billion and capital expenditures of $3.1 billion. On top of that, Lumen still had more than $1.1 billion of debt service.
So, the very basic reason Lumen's share price has been crashing is that it appeared the most likely outcome for the company was bankruptcy.
An AI Press Release and Earnings
To survive, Lumen needed something dramatic to go right for the company, and investors are betting that something is artificial intelligence.
You can read the press release Lumen issued today here , but the key part is highlighted below:
"Lumen Technologies (NYSE: LUMN) today announced it has secured $5 billion in new business driven by major demand for connectivity fueled by AI . Large companies across industry sectors are seeking to secure fiber capacity quickly, as this resource becomes increasingly valuable and potentially limited, due to booming AI needs. In addition, Lumen is in active discussions with customers to secure another $7 billion in sales opportunities to meet the increased customer demand.
To address this tremendous demand, which includes the recent Microsoft announcement , Lumen will more than double its intercity network miles over the next five years, while also providing access to a significant amount of installed dark fiber. In addition, Lumen has secured an agreement with Corning to be its preferred partner for its next-generation fiber-dense cable, which will help accommodate the increased data processing that AI requires."
Details on what this $5 billion in new business and over what time frame it could manifest were scant. However, you'll also note that Lumen hints at another $7 billion in business, bringing the total to $12 billion.
Second, Lumen released its second-quarter results tonight, which appears to be driving its after hours surge. The number to know is that Lumen is estimating $3.9 billion to $4 billion in EBITDA in 2024 in addition to $1.0 to $1.2 billion in free cash flow.
That would imply a massive uptrend in these second half of the year considering free cash flow in the second quarter was -$156 million.
When you consider that net cash interest is forecast at $1.15 to $1.25 billion, this guidance would imply incremental AI revenue may be enough to stave off bankruptcy.
We'll have more details on Lumen's earnings and what that means for its future in the coming days on 24/7 Wall St.
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