Why Lumen Technologies Rallied Back This Week

Key Points

• Lumen's stock rallied on the lower-than-expected CPI report.

• The company also announced a milestone for one of its key new products.

• Can CEO Kate Johnson engineer a turnaround? Results don't show it yet, but there's upside if she can.

• 10 stocks we like better than Lumen Technologies ›

Shares of Lumen Technologies (NYSE: LUMN) were bouncing back this week, up 17.7% through Friday at 12:40 p.m. ET, according to data from S&P Global Market Intelligence.

Lumen had fallen hard after a disappointing earnings report on July 31; however, there were a couple of positive news items this week that helped it regain ground, especially regarding its newer network-as-a-service product.

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Lumen's new products gaining traction as inflation cooperates

First, as a heavily indebted company, Lumen's stock can be sensitive to inflation and interest rate news. On that front, Tuesday's Consumer Price Index (CPI) report came in tamer than expected. Overall the July CPI rose 2.7% year over year and 0.2% month over month, which was slightly better than economists had predicted. In the wake of the release, economists ramped up their bets for an interest rate cut at the next Federal Reserve meeting in September.

Even after a bunch of refinancings and asset sales, Lumen's debt stands at $13.5 billion, or 3.9 times its projected earnings before interest, taxes, depreciation, and amortization (EBITDA). That's still a high leverage ratio, so the movement of interest rates is still very important to Lumen.

Turning to company-specific news, on Wednesday Lumen put out a press release touting its network-as-a-service (NaaS) offering, announcing the product had surpassed 1,000 customers.

Before, Lumen and peers would sell network capacity in fixed amounts; however, the new NaaS service functions on a usage basis, kind of like cloud computing services. That's likely a lot more appealing to customers, who now only pay for what they need. The more flexible service spans internet, Ethernet, and virtual private networks on demand, linking on-campus data centers to cloud hyperscalers and the edge.

Lumen first rolled the new product out toward the end of 2023, about a year after new CEO Kate Johnson took the helm.

Image source: Getty Images.

Lumen is a low-priced turnaround

Lumen's stock looks incredibly cheap, with a market cap of just $4.52 billion, or just 1.4 times this year's projected EBITDA. However, its huge debt load and continued revenue declines make the stock quite risky.

The stock is only appropriate for investors who may be familiar with its products and services, and therefore may be able to see a path to a turnaround in its end results. If the company can eventually grow newer products faster than legacy products are declining, there could be significant upside. However, as last quarter's results showed, that scenario still remains a ways off.

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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.