Three months ago, if you asked investors where telco Lumen Technologies (NYSE: LUMN) would be in five years, they might have argued about whether it would exist at all. Heavily indebted and priced like a stock headed into bankruptcy, most investors had lost faith in the company.
Perceptions changed in late July when it announced a partnership with Microsoft to connect its data centers and expand its network capacity. Lumen has since accelerated its digital transformation in earnest. The question now is how this will affect Lumen stock over the longer term.
Lumen's path forward
First, investors should remember that a lot can happen in five years, so predicting the path of an established company like Microsoft is difficult. Answering this question is even more difficult for a company like Lumen, which appeared to be left for dead by many investors as recently as three months ago.
Moreover, the partnership with Mircosoft does not guarantee Lumen's survival. Investors should remember that despite the run-up in the stock price, the company's market cap is just $6.5 billion.
Additionally, it continues to hold nearly $19 billion in debt, an obstacle that made the recent Microsoft deal all the more critical to its survival. Lumen is also in a financial status that could allow Microsoft to absorb its debt and still hold tens of billions in liquidity. And since Lumen's extensive fiber assets are now critical to Microsoft's cloud infrastructure, such a takeover would likely not surprise many investors.
Still, assuming Lumen remains a stand-alone entity over the next half-decade, it now has a path to prosperity. Its wireline and fiber assets were better geared for the telecom industry of the past before this deal. Fiber has not gone away in the wireless world, and the Microsoft deal confirms the value of updating this network and establishing its role in the tech industry of the future.
Prospects for recovery
The deal still leaves Lumen stock with considerable uncertainties. It released its earnings report for the second quarter of 2024 on August 6, two weeks after the public announcement of the Microsoft agreement.
Lumen's financials offer a mixed outlook. For 2024, the new free cash flow projection of $1.0 billion to $1.2 billion is significantly above the $100 million to $300 million it previously projected.
Lumen needs to increase CapEx spending to make the partnership with Microsoft work. To this end, it announced a deal with Corning to buy 10% of its fiber capacity for the next two years. Also, it made an agreement with Ciena division Blue Planet to digitize and streamline assets as well as consolidate service delivery.
Amid these investments, Lumen has struck a tone of optimism. It claims to have earned an additional $5 billion in new business amid the AI push. Although its financials have not reflected that improvement, Lumen at least has a necessary foundation that can help it return to growth.
Lumen in five years
Given Lumen's financial situation and rising role in the cloud industry, it is difficult to predict where the company will go. Nonetheless, the partnership with Microsoft and the money invested to upgrade its network dramatically reduced the possibility of bankruptcy.
Assuming a possible buyout never occurs, Lumen faces an uncertain future. The deal with Microsoft appears to make Lumen an indispensable part of Microsoft's cloud and AI future, a factor that should bode well for the company.
Nonetheless, the $19 billion in debt is a tremendous burden for a company with a market cap of less than $7 billion. Hence, its ability to manage and, ideally, reduce debt may have more influence over where the stock goes over the next five years. Thus, investors will likely have to watch and wait for a few more quarters before a firmer five-year trajectory materializes.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool recommends Corning and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
