Legacy Networks Will Falter As Cloud Competition Surges

Key Takeaways

• Shifting industry trends and technological change threaten Lumen's traditional services, risking long-term revenue growth and accelerating customer attrition.
  
• High debt and capital requirements constrain investment flexibility, increasing financial risk while competitors strengthen positions and compress margins.
  
• Lumen is capitalizing on industry tailwinds, locking in high-margin contracts, expanding in cloud networking, and streamlining operations to support predictable revenue and improved profitability.

Catalysts

A networking company, provides integrated products and services to business and mass customers in the United States and internationally.

• Lumen faces an ongoing shift in enterprise and government spending toward cloud-native and wireless-first platforms, which intensifies competitive pressure from hyperscalers and mobile operators. This is likely to erode demand for Lumen's traditional network services over time, putting long-term revenue growth at risk as customers increasingly bypass legacy infrastructure.
  
• The company's persistent reliance on capital-intensive fiber and network builds exposes it to execution risk and mounting capital requirements, while larger, stronger peers consolidate the industry and gain further cost and pricing power. This trend is expected to compress margins and limit Lumen's ability to sustain competitive investments, adversely impacting net margins and free cash flow.
  
• Accelerated technological change is driving underinvestment risk in next-generation infrastructure-including edge computing and software-defined services-relative to cloud-native competitors, which may lead to ongoing customer attrition and further shrink Lumen's revenue base as its offerings lag evolving enterprise needs.
  
• Lumen's high debt load, even after asset sales and refinancing, continues to constrain flexibility and elevates financial risk. Interest expense pressure and limited access to favorable financing terms may force the company to curtail strategic investments, eventually weighing on both earnings and future revenue prospects.
  
• Secular declines in legacy voice, VPN, and Ethernet offerings-consistent with ongoing double-digit attrition in key Nurture products-are set to accelerate, outpacing incremental growth in strategic segments. This imbalance indicates a sustained drag on top-line results, leading to persistent EBITDA and cash flow headwinds as the business struggles to pivot away from declining legacy revenues.

Lumen Technologies Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Lumen Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Lumen Technologies's revenue will decrease by 4.5% annually over the next 3 years.
• The bearish analysts are not forecasting that Lumen Technologies will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Lumen Technologies's profit margin will increase from -9.2% to the average US Telecom industry of 12.7% in 3 years.
• If Lumen Technologies's profit margin were to converge on the industry average, you could expect earnings to reach $1.4 billion (and earnings per share of $1.34) by about September 2028, up from $-1.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 2.0x on those 2028 earnings, up from -4.1x today. This future PE is lower than the current PE for the US Telecom industry at 15.5x.
• Analysts expect the number of shares outstanding to grow by 1.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.47%, as per the Simply Wall St company report.

Lumen Technologies Future Earnings Per Share Growth

Risks

• Secular growth in AI, cloud computing, and data center connectivity is materially increasing demand for high-capacity, low-latency fiber networks, positioning Lumen's infrastructure as a critical enabler and potentially driving sustained growth in top-line revenue.
  
• Lumen is successfully executing on large, multi-year PCF (Physical Connectivity Framework) contracts with hyperscalers and data center operators, locking in long-term, high-margin revenue streams that enhance revenue predictability and support EBITDA stability.
  
• Strong momentum in Lumen's Network as a Service (NaaS) and digital platform offerings-evidenced by rapid quarter-over-quarter growth in active ports, active services, and new customer adoption-expands the company's share in the fast-growing multi-cloud networking market, supporting future earnings expansion.
  
• Accelerated cost reduction, business simplification, and modernization programs are running ahead of schedule, materially reducing operating expenses, interest burden, and capital intensity, which together improve net margins and free cash flow.
  
• Strategic focus on enterprise, public sector, and wholesale segments-coupled with a transformative sale of the consumer fiber-to-the-home business-enables more targeted capital allocation and positions Lumen to pivot back to revenue growth and improved profitability by leveraging secular tailwinds and emerging commercial ecosystems.

Valuation

• The assumed bearish price target for Lumen Technologies is $2.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Lumen Technologies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.33, and the most bearish reporting a price target of just $2.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $11.2 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 2.0x, assuming you use a discount rate of 9.5%.
• Given the current share price of $4.72, the bearish analyst price target of $2.0 is 136.0% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.