It Is Time To Buy Lumen Technologies (NYSE:LUMN)

Lumen Technologies, Inc. (NYSE:LUMN) is at a significant turning point in the fast-changing telecommunications sector. The company’s most recent quarterly financial report presents a complex picture, featuring promising signs of incremental growth and troubling signals of financial vulnerability. This article offers a technical examination of Lumen’s stock price to predict its potential future path and identify suitable entry points for investment. The analysis reveals that the stock is currently oversold, making it an attractive buying prospect for investors.

Lumen’s Financial Performance

Lumen’s financial performance for the second quarter of 2023 has been a mixed bag, showcasing opportunities and challenges for the firm. On the positive side, the company reported an increase in Business Grow product revenue, which came in at $1.138 billion, up from $1.128 billion in the first quarter of 2023. This suggests that Lumen’s strategies to drive commercial excellence and secure the base have been somewhat adequate. The company has also accelerated its Quantum Fiber-enabled location deployments, with around 130,000 new fiber locations rolled out during the quarter, which could potentially serve as a future revenue driver.

However, the second quarter also exposed significant areas of concern for Lumen. The company reported a staggering Net Loss of $8.736 billion, primarily influenced by a non-cash goodwill impairment charge of $8.793 billion. This dramatic shift from a Net Income of $344 million in the same quarter last year raises questions about the company’s valuation and future profitability. Diluted earnings per share followed a similar downward trend, falling from $0.34 in Q2 2022 to a loss per share of $8.88 in the most recent quarter, although when excluding Special Items, the diluted EPS was a positive $0.10.

In addition, the company’s Adjusted EBITDA showed a significant decline from $1.811 billion in the second quarter of 2022 to $1.229 billion in the second quarter of 2023. The Net Cash Used in Operating Activities also hit negative at $100 million for Q2 2023. Moreover, Free Cash Flow turned negative at $896 million, compared to a positive $668 million in the same period last year. This negative trend in cash flow metrics is worrying and could affect Lumen’s capacity for future investments or even meet its short-term obligations if not rectified.

Kate Johnson, the President and CEO of Lumen, mentioned that the company is in the early stages of its three-pronged growth strategy. While the firm has seen solid revenue performance in its portfolio of next-generation growth products, the overall financial health appears compromised, especially considering the goodwill impairment and the negative cash flows. The substantial decline in Total Revenue, which fell to $3.661 billion in Q2 2023 from $4.612 billion in Q2 2022, further underscores Lumen’s need to reevaluate its growth and profitability strategies.

A Deep Dive into Lumen’s Oversold Conditions

The long-term technical outlook for Lumen presents an attractive entry point for long-term investors. This perspective is supported by the quarterly chart below, revealing a significant head and shoulders pattern on a broader scale. Although the price breached the neckline at $6 and has steadily decreased, the last seven quarterly candles have displayed strong bearish tendencies, indicating a downward trend. However, the past two quarters have shown congestion in the quarterly candles, suggesting the formation of a robust bottom at current levels. The consistent price decline over the past seven quarters also hints at a potential rapid rebound from these depths. Notably, the current price trades around the 1990 levels, where an initial market bottom was established. The RSI indicates that the recent drop began around the midline of the RSI, with the current price situated in the oversold territory of Lumen. This reinforces the notion that this level could mark a substantial long-term bottom.

This evident bottom can also be observed in the monthly chart below, highlighting the head and shoulder formations. The head is at all-time highs, while the shoulders are at $17.48 and $17.73. These technical factors contributed to the notable price drop. This decline is attributed to various factors, notably the company’s challenges adapting to rapid changes in the telecommunications and technology sectors. During this period, heightened competition from more agile competitors led to a loss of market share in key business segments.

Additionally, the reliance on outdated legacy services impacted revenues and profit margins. Investor sentiment was further dampened by substantial debt and ongoing capital expenditures for network upgrades. Despite efforts to diversify and introduce growth initiatives like Quantum Fiber, the perceived slow transformation pace, declining EBITDA, and negative free cash flow metrics contributed to sustained investor doubt, leading to a prolonged downward trend in the stock price since 2014.

It’s worth noting that the price decline has reached the 1990 low of $1.41. The recent low in Lumen’s price in 2023 hit $1.40, marking a 33-year low. Given the potential focus from investors, this presents an opportunity for a substantial momentum shift. The significance of this level could catalyze a new Lumen rally. The RSI on the monthly chart is also situated in oversold territory, indicating a potential robust reversal.

To delve deeper into the importance of this level, the weekly chart below showcases the short-term trading channel, illustrating the price fluctuations at current levels. The RSI rebounds from oversold levels and exhibits a bullish divergence, suggesting that the stock price is poised for a notable bounce. Investors may consider this level a compelling entry point for long-term investment, as the current stock price trades at a considerable discount.

Market Risk

Liquidity issues are underscored by the negative Free Cash Flow of $896 million and $100 million in Net Cash used for operating activities. These financial indicators could restrict Lumen’s growth prospects and ability to fulfill short-term financial commitments. Additionally, a year-over-year drop in total revenue from $4.612 billion to $3.661 billion is concerning. While there has been a slight uptick in Business Grow product revenue, it fails to compensate for the overall revenue decline, raising questions about the company’s long-term sustainability. Moreover, a significant decline in adjusted EBITDA could impact Lumen’s ability to maintain operational efficiency and service its debt. Lumen faces challenges adapting to quick shifts in the telecommunications and technology sectors, affecting its competitiveness. Heightened competition from more agile players has led to market share losses in key business segments for Lumen. Moreover, reliance on outdated legacy services could continue to affect revenues and profit margins negatively.

A downward trend has been consistent over the past seven quarters. This suggests that negative market sentiment remains entrenched, even though recent quarterly candles show congestion. The absence of market reversal indicators raises the risk of further stock consolidation at depressed levels before any significant market bottom is established.

Bottom Line

In conclusion, Lumen stands at a pivotal crossroads, caught between glimpses of growth potential and looming financial uncertainties. While there are pockets of promise, such as incremental gains in Business Grow product revenue and a robust rollout of Quantum Fiber-enabled locations, the overshadowing concerns—namely a steep net loss, declining EBITDA, and negative cash flow trends—cannot be ignored. The technical charts suggest an attractive entry point for long-term investors. The plunge to a 33-year low in price offers a compelling opportunity for investors. Although it’s not yet certain that the stock has reached its nadir, the current valuation is highly attractive and may warrant consideration for those with a long-term investment horizon.