Cogent (CCOI)

Internet service provider Cogent Communications (NASDAQ:CCOI) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 7.2% year on year to $247 million. Its GAAP loss of $1.09 per share was 6.5% below analysts’ consensus estimates.

Company Overview

Operating a massive network spanning 20,000 miles of fiber optic cable and connecting to over 3,200 buildings worldwide, Cogent Communications (NASDAQ:CCOI) provides high-speed Internet access, private network services, and data center colocation to businesses and bandwidth-intensive organizations across 54 countries.

Terrestrial telecommunication companies face an uphill battle, as they mostly sell into a deflationary market, where the price of moving a bit tends to decrease over time with better technology. Without dependable volume growth, revenue growth could be challenged. Unfortunately, broadband penetration in their core US market is quite high already. On the other hand, data consumption from streaming entertainment and 5G expansion could provide a floor on growth for the next number of years. As if that wasn't enough to worry about, competition is intense, with larger telecom providers and hyperscalers expanding their own networks.

Cogent Communications competes with major telecommunications providers like AT&T (NYSE:T), Verizon (NYSE:VZ), and Lumen Technologies (NYSE:LUMN), as well as specialized fiber network operators such as Zayo Group (private) and GTT Communications (private).

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $1.02 billion in revenue over the past 12 months, Cogent is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.

As you can see below, Cogent’s 13% annualized revenue growth over the last five years was excellent. This shows it had high demand, a useful starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. Cogent’s annualized revenue growth of 29.8% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

This quarter, Cogent missed Wall Street’s estimates and reported a rather uninspiring 7.2% year-on-year revenue decline, generating $247 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 3.1% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will face some demand challenges.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Cogent’s high expenses have contributed to an average operating margin of negative 1.4% over the last five years. Unprofitable business services companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

Looking at the trend in its profitability, Cogent’s operating margin decreased by 36.2 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Cogent’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

Cogent’s operating margin was negative 16.3% this quarter. The company's consistent lack of profits raise a flag.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Cogent, its EPS declined by 47.3% annually over the last five years while its revenue grew by 13%. This tells us the company became less profitable on a per-share basis as it expanded.

Diving into the nuances of Cogent’s earnings can give us a better understanding of its performance. As we mentioned earlier, Cogent’s operating margin improved this quarter but declined by 36.2 percentage points over the last five years. Its share count also grew by 2.8%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

In Q1, Cogent reported EPS at negative $1.09, up from negative $1.38 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street expects Cogent to improve its earnings losses. Analysts forecast its full-year EPS of negative $4.01 will advance to negative $3.04.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Cogent’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 1.9%, meaning it lit $1.92 of cash on fire for every $100 in revenue.

Taking a step back, we can see that Cogent’s margin dropped by 37.5 percentage points during that time. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business.

Cogent burned through $21.74 million of cash in Q1, equivalent to a negative 8.8% margin. The company’s cash burn was in line with the same quarter last year. Although its free cash flow profile is unattractive today, we’re optimistic Cogent can achieve future cash profitability given the merits in other aspects of its business.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Cogent hasn’t been the highest-quality company lately because of its poor bottom-line (EPS) performance, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 28.3%, splendid for a business services business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Cogent’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Cogent burned through $203.7 million of cash over the last year, and its $2.07 billion of debt exceeds the $184 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Cogent’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Cogent until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We struggled to find many positives in these results. Its EPS missed significantly and its revenue fell slightly short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 4.1% to $50.98 immediately following the results.

Updated: May 10, 2025 at 11:52 PM EDT

Before deciding whether to buy Cogent or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Cogent isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was impressive over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out. And while the company’s stellar ROIC suggests it has been a well-run company historically, the downside is its declining EPS over the last five years makes it a less attractive asset to the public markets.

Cogent’s EV-to-EBITDA ratio based on the next 12 months is 6.7x. Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $74 on the company (compared to the current share price of $49.30).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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