The buildout of the fiber network and high-speed internet access is starting to unravel in the US. Here, Cogent Communications Holdings, Inc. (NASDAQ:CCOI) has had its operations dating back to 1999. Valuation for the business has grown impressive and now sits above $3.29 billion. Where CCOI has set itself apart is the steady revenue growth it has had. Providing on-net access to many business and healthcare facilities, the revenues for CCOI are predictable and reliable.
The revenues of the business have been steadily growing at a 6.12% CAGR over the last 10 years. The growth projections going forward seems strong as CCOI aims to grow the net margins to its historical range of 4.5% – 4.6%. I don’t like the price levels it’s at right now, but I am confident about the long-term prospects of it and will be having it as a hold for the moment.
CCOI delivers high-speed internet access, private network solutions, and data center colocation services across a global expanse that covers North America but also international customers. This diverse geographical coverage underscores the company’s ability to serve a wide spectrum of industries and businesses, facilitating seamless connectivity and efficient data management across continents.
There are a lot of investments right now going into expanding the fiber access in the US and I think this will ultimately be a solid tailwind for CCOI and one that results in stronger and broader demand.
CCOI has experienced strong demand as it’s being propelled by a significant positive force in the form of the surging infrastructure investments taking place across the United States. The current landscape is marked by a robust commitment to fortify the nation’s foundational infrastructure, with a particular emphasis on the expansion and enhancement of fiber networks. This shift towards a more interconnected and digitally resilient society provides CCOI with a compelling opportunity to harness this momentum for its growth.
Undoubtedly, the development of a robust fiber network is a capital-intensive endeavor, demanding substantial investments to lay the groundwork for enhanced connectivity and digital innovation. CCOI stands poised to reap the rewards of this endeavor, positioning itself as a key player in the ever-expanding realm of fiber optic infrastructure. As the company aligns itself with the national drive to bolster connectivity, it leverages its expertise to provide the crucial technological backbone that modern society relies upon.
Looking at the international market and more precisely the Chinese internet access or broadband access market, it’s clear that steady growth and demand will persist. Up until 2030, the CAGR of the global market is estimated to be around 9.7%. The largest reason for this growth comes as more and more people are getting access to it, and a surge in wireless users is also boosting demand. For CCOI, I think this represents a market that is easier to get into and start establishing themselves in.
Looking at the most recent earnings report from the company, it showcased a fantastic bottom line result following the Bargain purchase, which netted the company a $1.2 billion gain. EPS came in at $23.84 and resulted in a raise to the regular quarterly dividend as well.
The service revenues for the quarter landed at $239 million, showcasing a QoQ increase of 56.1% and a 61.5% YoY increase. This added momentum to the share price, and it quickly flew up in the span of a few days. But since the quarterly results seemed like a “one thing” the bargain purchase of $1.2 billion helped move the bottom line heavily towards the positive side. For Q3, estimates are still a negative EPS of $0.77. What may have enticed investors though was the solid customer growth of 58.1% on a YoY basis. The FWD p/e now sits at 3.17, which is down because of the EPS results last quarter offered. I doubt that CCOI presents such a better investment case because of these results. With a negative bottom line based on previous results, the company is still trading not based on fundamentals, but rather speculation. 2023 will be a net income positive year because of the last year, but CCOI will return to the negative in 2024 most likely, making it a speculative bet still. The low FWD p/e is based on 2023 numbers and when looking ahead at 2026 for example it’s at 30, indicating results of 2023 are not likely to be too consistent.
Within the telecommunications landscape, CCOI encounters a formidable challenge posed by the industry’s profoundly competitive environment. This dynamic sector sees the convergence of established giants and nimble newcomers, all vying for their share of the market pie. Amidst this spirited rivalry, CCOI navigates a terrain where maintaining its market standing requires constant innovation, adaptability, and strategic finesse.
CCOI’s success hinges on its ability to differentiate its offerings in a field teeming with diverse solutions. Established players bring their legacy strengths, while emerging entrants inject fresh perspectives and disruptive technologies. As such, the battle for customers’ attention, trust, and loyalty is fierce. CCOI’s capacity to carve a niche and deliver unique value becomes pivotal in this crowded arena, where market share can fluctuate with the changing tides of customer preference.
Comparing CCOI to the sector, we see a clear discrepancy. The FWD p/e of the company is just under 4 because of the recent beat on the bottom line. Historically however, the company has traded at an incredibly high valuation, nearly at 90x earnings on a forward basis. But I think as the margins are improving we should expect a better valuation for the business, more similar to the sector instead.
Where I think CCOI is getting this from is the fact it has a fantastic business model which lends itself to reliable and consistent revenues and earnings. That is hard to come by and why CCOI is trading where it is.
I think that CCOI is a fantastic company, but one that is unfortunately trading at quite the premium to where I would be willing to buy. The company holds a strong share of the market and will likely have very reliable and consistent revenues going forward, supporting the dividend yield. The company has been growing the dividend at a quick rate, and I think maintaining a hold in the company seems beneficial to be able to take part in future increases.