Pricing Pressures Will Squeeze Telecom Margins

Key Takeaways

• Falling prices and industry shifts toward edge computing are likely to erode Cogent's revenue growth and compress its margins over time.
  
• Reliance on expiring transitional payments, unsold data center assets, and rising competition increases pressure on earnings, liquidity, and long-term financial health.
  
• Robust demand for bandwidth, effective network expansion, margin improvements, and shareholder-friendly capital allocation position Cogent for resilient growth and increased investor appeal.

Catalysts

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

• The persistent decline in average price per megabit-down 11% sequentially and 30% year-over-year for installed base contracts, and falling even more sharply on new contracts-shows accelerating long-term pricing pressure in backbone connectivity, likely to erode revenue growth and compress margins as bandwidth becomes commoditized.
  
• Cogent's business model remains exposed to the shift away from centralized backbone networks toward mobile, wireless, and edge computing solutions; as data usage moves to distributed, localized processing and hyperscalers build their own private fiber networks, long-term demand for Cogent's wholesale IP transit and fixed fiber services could steadily shrink, leading to ongoing top-line pressure and reducing future growth prospects.
  
• The heavy reliance on recurring quarterly payments from T-Mobile's transition services agreement to support adjusted EBITDA distorts the true earnings power of the business; when these payments step down and ultimately expire in 2027–2028, Cogent's earnings and leverage ratios could deteriorate sharply unless core revenue inflects higher, creating substantial risk to net income, debt service capability, and the current dividend.
  
• The inability to monetize the company's underutilized data center assets-where no firm sale or binding deposit has materialized despite multiple letters of intent-suggests that divestiture proceeds may never materialize at hoped-for values, eliminating an important future source of liquidity and potentially resulting in asset impairment charges and a weakened balance sheet.
  
• Intensifying competition from hyperscalers, rapid telecom industry consolidation, and ongoing regulatory scrutiny around net neutrality and infrastructure security could reduce Cogent's pricing power, increase required capital expenditures, and make the business structurally less profitable over time, ultimately pressuring earnings growth and elevating long-term execution risk.

Cogent Communications Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Cogent Communications Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Cogent Communications Holdings's revenue will grow by 7.3% annually over the next 3 years.
• The bearish 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 -23.4% to the average US Telecom industry of 12.7% in 3 years.
• If Cogent Communications Holdings's profit margin were to converge on the industry average, you could expect earnings to reach $145.2 million (and earnings per share of $2.74) by about August 2028, up from $-216.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, up from -6.7x today. This future PE is lower than the current PE for the US Telecom industry at 15.8x.
• Analysts expect the number of shares outstanding to grow by 3.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.34%, as per the Simply Wall St company report.

Cogent Communications Holdings Future Earnings Per Share Growth

Risks

• The accelerating adoption of bandwidth-intensive applications like video streaming, artificial intelligence, and cloud computing is leading to sustained growth in global data consumption, driving increased demand for Cogent's high-speed internet backbone and wavelength services, which could support top-line revenue growth for years to come.
  
• Successful integration of the acquired Sprint wireline assets is expanding Cogent's fiber network and customer base, providing tangible opportunities to boost recurring revenues and gain share in the North American wavelength market, with management targeting a significant share of that segment.
  
• Cogent is consistently expanding operating margins, demonstrated by recent quarter-over-quarter EBITDA margin improvements and a multiyear track record of margin expansion tied to the shift to higher-margin on-net services, which could lead to ongoing improvement in net margins and earnings.
  
• The company's commitment to increasing dividends and executing meaningful share buybacks, coupled with strong recurring cash flows and a history of consistent dividend growth, may attract income-oriented and long-term investors, helping to support valuation and lower its cost of capital over time.
  
• Growth in on-net and wavelength business is underpinned by long-term secular trends in digital transformation and remote work, and with a significant backlog in high-value wavelength sales, Cogent is positioned to benefit from industry consolidation and further adoption of fiber and next-generation connectivity, which could result in resilient revenue and EBITDA growth in the future.

Valuation

• The assumed bearish price target for Cogent Communications Holdings is $30.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Cogent Communications Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $91.0, and the most bearish reporting a price target of just $30.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $145.2 million, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $30.62, the bearish analyst price target of $30.0 is 2.1% lower. The relatively low difference between the current share price and the analyst bearish 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.