Lumen's NaaS Growth Sparks Bullish Call Amid Persistent Financial Risks

What happened

A Seeking Alpha article argues Lumen Technologies is rapidly evolving from a legacy telco into a high-margin tech platform, citing 32% sequential growth in its Network-as-a-Service business and partnerships with tech giants like Palantir and Microsoft. DeepValue's master report acknowledges Lumen's operational momentum in Q3 2025, including EBITDA beats and a cost-reduction plan targeting over $1 billion in savings by 2027. However, the report critically highlights elevated leverage with a Net Debt/EBITDA ratio of 4.2x, negative interest coverage, and refinancing risks that constrain the company's flexibility. Valuation concerns persist, with a DCF base value of $5.90 compared to the current $7.68 share price and an EV/EBITDA of about 24x, suggesting the stock is not cheap despite growth initiatives. Ultimately, while the transformation narrative gains traction, investor optimism must be tempered by execution risks and financial hurdles detailed in SEC filings.

Implication

The bullish article may attract interest, but deep-seated financial issues like $17.5 billion in debt and covenant compliance risks necessitate a disciplined investment approach. For any re-rating to occur, Lumen must successfully execute on its PCF/NaaS adoption, achieve the targeted $1 billion in cost savings by 2027, and close the AT&T consumer FTTH sale on favorable terms. Meanwhile, the current EV/EBITDA of 24x suggests the stock is not cheap, and the negative interest coverage indicates cash flow challenges that could hinder growth investments. Investors holding the stock should watch for progress on refinancing, debt reduction from asset sales, and sustained NaaS revenue conversion as key catalysts for an upgrade. Until these risks are mitigated, maintaining a HOLD stance is prudent, with potential upside contingent on flawless execution and downside protection limited by the high debt load.

Thesis delta

The new article introduces a more optimistic view on Lumen's valuation, suggesting it deserves tech-like multiples due to NaaS growth. However, this does not materially shift the core thesis from the DeepValue report, which already acknowledges growth potential but emphasizes that financial stability and execution must improve before a re-rating is justified. Therefore, the thesis remains unchanged: a conditional HOLD with key watch items on balance-sheet progress and NaaS traction.