The shares of Integrated technology and communications company Lumen Technologies, Inc. (LUMN - Get Rating) have gained 32.9% over the past year, and 35.6% year-to-date.

The company has been named a leader in the March 2021 Gartner Magic Quadrant for Network Services, Global, given its accomplishments in the virtual network services and cloud computing space.

Currently trading at a discount to its peers, investors are grabbing the stock given the ongoing value rotation in the broader market. However, the company’s frail financial strength and surging debt levels are a concern.

Here’s what we think could drive LUMN in the near term:

5G Infrastructure

After the robust growth of cloud computing services over the past year in the wake of the COVID-19 pandemic and remote working trend, the technology industry is gearing up to deploy disruptive 5G technology worldwide. With the potential to digitize virtually every industry, as well as power smart cities, the United States is in the forefront of the global 5G race, with the next-generation technology already launched in several parts of the country. The global 5G industry is expected to grow at a CAGR of 46.2% over the next eight years, according to Grand View Research.

Given LUMN’s business model, the company stands to benefit significantly from the burgeoning  5G space because  it is monetizing its nationwide fiber connectivity by partnering with the biggest network carriers in the country. This comes in after LUMN displayed its strong foothold in the cloud computing sector by expanding its Edge Computing infrastructure last month.

Click here to checkout our 5G Industry Report for 2021

Weak Financials

Despite generating $20.71 billion in revenues over the past year, the company has failed to generate profits. Its trailing-12-month return on sales is negative 5.95%, while its return on equity is negative 10%.

Furthermore,  the company has a significant amount of debt. Its trailing-12-month total debt-to-equity and long-term debt/total capital are 301.2% and 68.8%, respectively. With current and quick ratios of 0.48 and 0.37, respectively, the company poses significant liquidity risk.

In terms of long-term performance, LUMN’s revenues have risen at a CAGR of 5.5% over the past three years. However, its  revenues and EPS have declined 3.5% and 76.8% year-over-year, respectively. Its levered free cash flow has declined  at a rate of 14.1% over the past three years, while its total assets have declined at a CAGR of 7.7% over this period.

Consensus Price Target Indicates Potential Downside

Of the five Wall Street analysts that rated the stock, one rated it Buy, while two  rated it Hold and Sell, respectively.

Also,  analysts expect LUMN to hit $9.87 soon, representing  a potential downside of 21.1%.  

POWR Ratings Reflect Uncertain Prospects

LUMN has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

LUMN has a C grade for Growth, Quality and Stability. The company’s poor growth trajectory and low profitability are in sync with its Growth and Quality grades. Also,  the stock has a beta of 1.10, justifying its Stability grade.

LUMN is ranked #15 of 25 stocks in the D-rated Telecom – Domestic industry. In addition to the grades we’ve  highlighted, one can check out additional LUMN Ratings for Value, Sentiment and Momentum here.

You can check out the top-rated stocks in the Telecom – Domestic sector here.

Bottom Line

Despite being a popular name in the telecom space, LUMN is struggling with low profitability. Furthermore,  because fiber internet technology is facing obsolescence, we think  investors should wait until the company launches a fool-proof operational plan to capitalize on the impending tech transition before jumping in.

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LUMN shares were trading at $13.57 per share on Thursday afternoon, up $0.35 (+2.65%). Year-to-date, LUMN has gained 41.82%, versus a 4.61% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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