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Why Lumen Technologies Sank Today

The Motley Fool · 17h ago

Key Points

  • Lumen delivered a top-line miss but a bottom-line beat.

  • However, its strategic revenue is growing double-digits, which now makes up over half of revenue.

  • Lumen remains a highly-indebted turnaround story, and investors had no appetite for risk on a brutal day for tech stocks.

Shares of Lumen Technologies (NASDAQ:LUMN) plunged 12.9% on Thursday, as of 1:35 p.m. EDT.

Lumen reported earnings today, but its mixed results were almost beside the point. The entire AI sector, including semiconductors, networking, and the "pipes" on which AI runs, including Lumen's fiber network, sold off hard today amid fears that Democrats will stop or slow the progression of AI innovation and the data center build-out.

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Lumen delivers a bottom-line beat, but to no avail

In the third quarter, Lumen saw revenue decline by 12% to $2.72 billion, missing estimates, while adjusted (non-GAAP) earnings per share improved to a loss of ($0.14), up from ($0.20) a year ago. That profit figure actually beat analyst estimates.

Those numbers don't look particularly great, but investors are likely aware that Lumen is in the midst of a turnaround. Under the hood of its declining legacy business, Lumen points out that its "strategic" revenue, such as networking-as-a-service and its private connectivity fabric, grew 10% year-over-year, and now makes up 55% of Lumen's revenue base, up from 53% last quarter.

That left some room for optimism. However, today the entire AI complex took a major downturn, as newly elected Democratic politicians made several anti-data-center and anti-AI comments. That appeared to prompt investors to contemplate a potential slowdown in the data center build-out next year and beyond.

An aerial view of a city with illuminated networks.

Image source: Getty Images.

What to do with Lumen

Lumen didn't exactly have strong growth prospects to begin with and was more of a value turnaround opportunity. However, Lumen still has a somewhat high debt load, with around $13.2 billion in gross debt and $11.3 billion in net debt. That's still about 3.5 times this year's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) guidance, which is significant. Given how many high-quality technology stocks are on sale right now, it's probably best to look for the stock of a less-indebted tech company to buy on this dip.

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.