On Friday, Wells Fargo (NYSE:WFC) adjusted its stance on Lumen Technologies, downgrading the company’s stock from Equal Weight to Underweight. The firm also revised its price target to $4.00, up from the previous target of $1.75. This change comes as Lumen’s shares have seen a significant surge, outperforming the market with a 378% increase over the past month, while the S&P 500 experienced a 2.0% decline.
The analyst from Wells Fargo cited that Lumen is now valued at approximately 6 times its next twelve months (NTM) EBITDA, which aligns it with competitors such as AT&T (NYSE:T), Verizon (NYSE:VZ), and Frontier Communications (OTC:FTRCQ). These peers are currently growing their revenue and EBITDA, doing so with lower leverage.
The new price target of $4.00 is derived from a 5-year discounted cash flow (DCF) analysis, which assumes a terminal value (TV) EBITDA multiple of around 7 times and a weighted average cost of capital (WACC) of approximately 14%.
One of the primary concerns highlighted by the analyst is Lumen’s substantial debt, which exceeds $19 billion in long-term maturities. The ability to manage this debt is seen as a significant challenge for the company moving forward.
The revision of Lumen’s stock rating and price target reflects Wells Fargo’s perspective on the company’s current valuation in relation to its industry peers and the challenges it faces with its debt obligations. As Lumen’s stock adjusts to these new expectations, investors are provided with an updated assessment of the company’s financial outlook.
In other recent news, Lumen Technologies has been making significant strides in its operations and financial performance. The company recently announced its second quarter 2024 earnings, revealing a robust operational turnaround with nearly $5 billion in sales, primarily driven by artificial intelligence hyperscaler customers.
TD Cowen, an independent analyst firm, has maintained a hold rating on Lumen Technologies, while raising the price target to $7 from the previous $2.50. This decision was influenced by Lumen’s recent announcement of mixed second-quarter results and significant developments in its GenAI project.
The company’s executives have expressed confidence in their strategy to prioritize asset penetration and deliver shareholder returns, with a focus on the growth potential in the AI market.
The company plans to achieve $1 billion in cost savings by 2027 through infrastructure simplification and expects a rebound in EBITDA in 2026 and beyond. It’s worth noting that while the company’s aggressive pursuit of new deals and partnerships in the AI space indicates a forward-looking approach, these changes may not significantly impact Lumen’s revenue, EBITDA, or recurring free cash flow in the near term, according to TD Cowen’s analysis.
