We are short shares of Lumen Technologies, a $26bn telecommunications company trying to spin how AI will fuel the dramatic turnaround of a secularly declining business saddled with $19bn of debt. In recent weeks, a mixture of buzzy headlines, misplaced retail investor enthusiasm, and short covering has sent a previously moribund stock soaring 400%. Incredibly, Lumen, a company with a long history of disappointing investors and which just reported EBITDA down -13%, is now trading in line with telecom peers with healthy growth outlooks, lower leverage, and attractive dividends. We understand the allure of trying to find the next great AI play, but at these levels, an investment in Lumen lacks more than just artificial intelligence.

Lumen’s recently announced $5bn in Private Connectivity Fabric deals isn’t about AI, it’s a desperate bid to raise cash amid deteriorating revenues and growing liquidity concerns. Lumen will net only ~$800m from these deals in the next few years. Longer-term, the contracts provide a meager ~$21m / year in recurring profit for operations and maintenance. While any infusion of cash is admittedly positive for a company that would otherwise bleed out, the deals do not solve Lumen’s fundamental growth and balance sheet problems. Awarding $5 in share gains to what we estimate is only $1.18/share in total value, from Lumen’s role as general contractor on a massive construction project, is just silly.

Lumen has identified $7bn in additional “sales opportunities” but customers in this tranche are  not leading technology firms like Microsoft with ambitions to sell AI tools and platforms. Rather, they are enterprises in healthcare, retail, financial services, etc. Hyperscalers and other large technology companies are building out remote datacenter footprints and need to purchase new connectivity infrastructure at scale. None of that applies to bureaucratic, regulated healthcare companies and banks, which are only beginning to explore what AI might mean for their businesses and will lean on cloud providers for their needs for the foreseeable future. By Lumen’s own admission, discussions with these institutions are in an early phase, and we believe will take long to close and face rising competition.

The deal announcement (timed conveniently the day before weak 2Q earnings) distracted investors from underlying business trends which showed further deterioration across nearly every key category. Core Business segment revenue fell -8.6%, the worst in company history. Business segment products the company has targeted for growth actually fell -1.1% in 2Q, while legacy product declines continue to spiral downward due to post-pandemic workplace restructurings. Despite considerable investment in new product development and sales force productivity, former executives we interviewed stated Lumen’s software applications remain uncompetitive against those of leading tech competitors. Consequently, we view Lumen’s strategy of trying to become more than a dumb pipe and transitioning customers from legacy products to more modern cloud-based services as flawed and the company will continue to fail at stabilizing the business.

AI is an exciting technology and there are many compelling ways to invest in this powerful theme. A rapidly shrinking wireline telecom with inferior software and a history of underdelivering on growth is not one of them. The new deals provide near-term cash but then what? We expect AI deal hype will fade to dismal legacy telco reality, leaving the company’s share price much like its fiber – buried in the ground.

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