Company Will Capitalize On Data Center Demand By Converting Former Sprint Facilities

Key Takeaways

• Integration of the Sprint acquisition is expected to improve margins and reduce costs, enhancing EBITDA and net margins by mid-2026.
  
• Expansion in wavelength services and data center optimization will drive revenue growth and improve market share and earnings potential.
  
• Reduced IP transit payments and decreased revenues raise financial strain, while high debt and contract terminations pose short-term risks, impacting flexibility and margins.

Catalysts

Through its subsidiaries, provides high-speed Internet access, private network, and data center colocation space services in North America, Europe, Oceania, South America, and Africa.

• Ongoing integration and synergies from the Sprint Global Markets business acquisition are expected to realize full potential cost savings of $220 million by May 2026, aiding EBITDA margin improvement and potentially boosting net margins.
  
• The development and planned increase in wavelength services to over 800 North American locations by the end of 2024 are projected to drive revenue growth in the wavelength business, aiming for a long-term revenue target, which supports overall top-line growth.
  
• An anticipated acceleration in demand for data center power is driving Cogent to convert former Sprint facilities, potentially leading to significant asset monetization through sales or long-term leases, positively impacting earnings and cash flow.
  
• Cogent's strategy to expand its data center footprint and optimize its network to provide competitive pricing and service reliability positions the company to capture a more significant market share, enhancing revenue streams from existing and new customer segments.
  
• The increase in IPv4 leasing revenue, driven by a strategic price increase and anticipated continued demand, offers a pathway to boost earnings, reflecting strong revenue growth in this business line.

Cogent Communications Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cogent Communications Holdings's revenue will grow by 8.7% annually over the next 3 years.
• Analysts are not forecasting that Cogent Communications Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Cogent Communications Holdings's profit margin will increase from 4.0% to the average US Telecom industry of 12.3% in 3 years.
• If Cogent Communications Holdings's profit margin were to converge on the industry average, you could expect earnings to reach $153.9 million (and earnings per share of $3.02) by about February 2028, up from $39.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.3x on those 2028 earnings, down from 96.8x today. This future PE is greater than the current PE for the US Telecom industry at 16.4x.
• Analysts expect the number of shares outstanding to grow by 2.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Cogent Communications Holdings Future Earnings Per Share Growth

Risks

• The reduction in IP transit payments from T-Mobile, decreasing from $66.7 million to $25 million per quarter, could negatively impact EBITDA and leverage ratios. This decline in a significant revenue stream may lead to increased financial strain.
  
• The substantial decrease in corporate and netcapital year-over-year revenues for key segments, at 3.5% and 3.2% respectively, highlights potential challenges in sustaining growth and maintaining market share, which can impact long-term revenue growth.
  
• The high net debt ratio of 4.13, increased from 3.14 last quarter, due to reduced revenue streams and increased spend, raises concerns about financial leverage and could limit the company's flexibility in responding to emerging opportunities or downturns, impacting net margins.
  
• Continued grooming and termination of low-margin off-net and noncore contracts reduce current revenues, and though beneficial in the long term, poses a risk of immediate revenue dips affecting short-term earnings.
  
• The modest adjustments in cost of goods sold despite strategic initiatives indicate ongoing operational costs, particularly related to the Sprint network integration, which could persist, affecting net margins.

Valuation

• The analysts have a consensus price target of $82.091 for Cogent Communications Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $102.0, and the most bearish reporting a price target of just $55.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $153.9 million, and it would be trading on a PE ratio of 32.3x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $80.39, the analyst price target of $82.09 is 2.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.