Lumen Technologies (NYSE: LUMN) has experienced skyrocketing share price in the last month, making it one of the top-performing stocks based on total 30-day returns in the area of 323% as of this writing. Earlier this month, Lumen shares topped $6 for the first time since late 2022. All of this momentum has drawn investor attention to this legacy telecommunications infrastructure firm, once written off for struggling to adapt to rapid shifts in communications technology.

Is the rally justified? Taken as a group, analysts don't believe so, at least not to the degree seen in recent weeks. An average price target of $3.74 is a full 38% lower than the current stock price, suggesting analysts expect Lumen to reverse course sharply. Taking stock of both the bullish and bearish views on Lumen may help provide retail investors with much-needed perspective before deciding to invest in this company.

Lumen's AI Focus and Microsoft Deal Signal Future Growth

Much of the excitement around Lumen relates to newfound AI potential, perhaps best encapsulated by last month's announcement of a partnership with Microsoft Corp. (NASDAQ: MSFT) in which Lumen will support the tech giant's data center expansion efforts. Besides potentially leading to billions in cash flow, the Microsoft agreement has reframed Lumen as a company poised to deliver key AI infrastructure to legions of firms looking to further integrate this tech into their business models.

Although not directly impacted by the financial component of the Microsoft agreement, Lumen's latest quarterly report also gives some reasons for optimism. Revenue was slightly under $3.3 billion, down year-over-year but ahead of analyst predictions. Adjusted EBITDA was also down by over $200 million, but the firm raised its full-year guidance in this area alongside a lift in anticipated free cash flow. Both of these are positive signs that the AI boom could have a tangible benefit for Lumen.

Lumen Faces Debt Challenges Despite Microsoft Partnership

The Microsoft partnership has drawn headlines, but digging deeper reveals that Lumen still faces a tough road ahead despite a potential second life as an AI infrastructure company.

As of the second quarter, Lumen's long-term debt totaled $18.4 billion, down slightly year-over-year. Though carrying debt isn't necessarily a bad thing, Lumen lacks a clear path out of this position. Its legacy telecom businesses are faltering, and a large-scale shift toward AI would likely require costly growth initiatives that could make the problem worse.

Looking at Lumen's latest quarterly report again, net losses narrowed significantly. Still, they constituted a shift away from net gains in 2023 when accounting for an $8.8-billion non-cash goodwill impairment charge last year. Analysts expected net losses in the second quarter of 2024, but diluted losses per share of 13 cents were more significant than the 6 cents they anticipated.

On a more granular level, many of Lumen's business lines have struggled in the last year, with Large Enterprise, Mid-Market Enterprise, North America Enterprise, Wholesale, and International sales all down year-over-year.

Trouble with legacy businesses could be partially written off if Lumen had a clear public timeline for when it will see a cash influx from the Microsoft deal and other AI efforts. At this stage, however, there is little to confirm to investors that these ventures will be able to pay down a large chunk of Lumen's debt load this year or any time soon after that. In addition to the impact of high interest rates in recent quarters, Lumen's debt concerns have become even tougher to manage.

Lumen's Rally Fueled by Speculation?

Lumen stock has quadrupled since the company's July 24 announcement of its partnership with Microsoft. Based on the factors above, it appears that a substantial driver of this rally is investor speculation that the deal signals a newly profitable path forward for the company with a history extending back almost 100 years.

Though there are reasons to be bullish on Lumen stock, the warning signs are significant and likely to remain unless there are other fundamental changes for the company on the horizon.

Ultimately, even as Lumen shares continue their stratospheric ascent, investors still have reason to consider this company cautiously before buying in.