Lumen Technologies (LUMN) stock fell more than 10% Tuesday after Kerrisdale Capital said it is short the company, citing deep concerns about its financial stability and growth prospects.
Lumen, which has seen its shares surge by 400% recently, is facing renewed scrutiny as it attempts to leverage artificial intelligence to revitalize its business, which has been struggling with significant debt and declining revenue.
Kerrisdale Capital's short report criticizes Lumen's recent stock surge, claiming it is driven by "buzzy headlines" and "misplaced retail investor enthusiasm."
The firm argues that the company's fundamentals remain weak despite the hype.
Lumen's recent announcement of a $5 billion deal in Private Connectivity Fabric is described as a "desperate bid to raise cash amid deteriorating revenues and growing liquidity concerns."
According to Kerrisdale, "net only ~$800m from these deals in the next few years" and provide a "meager" $21 million annually in recurring profit for operations and maintenance.
The Kerrisdale short report claims that Lumen's efforts to pivot towards AI and modern cloud-based services are insufficient to address its core issues.
The short-seller adds that Lumen's core business segment revenue plummeted by 8.6% in the second quarter, marking the worst decline in the company's history.
Moreover, they add that business segment products, which Lumen targeted for growth, actually fell by 1.1% in the same period.
Kerrisdale argues that Lumen's software remains uncompetitive compared to leading tech rivals and that its strategy to transition from legacy products to newer cloud services is flawed.
"AI is an exciting technology and there are many compelling ways to invest in this powerful theme. A rapidly shrinking wireline telecom with inferior software and a history of underdelivering on growth is not one of them," states Kerrisdale.
The firm says that the current hype around AI will eventually give way to the company's "dismal legacy telecom reality," potentially driving its share price back down.