Lumen’s stock price has taken a beating over the past six months, shedding 20.5% of its value and falling to $5.07 per share. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Lumen, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Despite the more favorable entry price, we don't have much confidence in Lumen. Here are three reasons why we avoid LUMN and a stock we'd rather own.
Why Do We Think Lumen Will Underperform?
With approximately 350,000 route miles of fiber optic cable spanning North America and the Asia Pacific, Lumen Technologies (NYSE: LUMN) operates a vast fiber optic network that provides communications, cloud connectivity, security, and IT solutions to businesses and consumers.
1. Revenue Spiraling Downwards
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Lumen struggled to consistently generate demand over the last five years as its sales dropped at a 9.4% annual rate. This wasn’t a great result and signals it’s a low quality business. 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Lumen, its EPS declined by 16.6% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Lumen’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Lumen, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 1.5× forward EV-to-EBITDA (or $5.07 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d suggest looking at the most entrenched endpoint security platform on the market.
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