KeyBanc downgrades Cogent Communications stock rating on growth concerns

KeyBanc has lowered its rating on Cogent Communications (CCOI) stock to Sector Weight from Overweight, expressing concerns over the company's growth prospects. The stock has plummeted by over 30% in a single week, trading near its 52-week low of $4.51, currently priced at $4.69. KeyBanc cited slow growth in the legacy business, a sluggish ramp-up in Waves, and a continuous decline in Sprint revenue as key factors affecting revenue growth.

The firm further noted that cost-cutting initiatives and data center sales have yielded limited benefits, and pointed to refinancing challenges and negative free cash flow as additional red flags. Levered free cash flow is a negative $142.92 million, as reported by InvestingPro Tips, which scores CCOI as WEAK in financial health.

Cogent's total revenue of $231.2 million fell short of the estimated $234.9 million, with a constant currency growth rate of -4.2% year-over-year. Adjusted EBITDA of $48.9 million was below the $50.5 million consensus, resulting in a margin of 21.1% versus a 21.5% expectation. The firm's revenue breakdown showed Corporate revenue at $97.1 million, Net-Centric at $107.2 million, and Enterprise at $27 million, all lower than the estimated figures.

Sprint revenue was approximately $29 million, falling short of the $34 million from the previous quarter. Core Cogent revenue stood at around $201 million, slightly below the $200 million estimate in the second quarter. Growth in the Core Cogent segment has slowed to a near flat quarter-over-quarter pace, and with Sprint revenue dipping by roughly $5 million, it's challenging to foresee a near-term return to robust revenue growth.

Cogent Communications recently disclosed its third-quarter earnings, reporting a narrower-than-expected adjusted loss per share of $0.62, compared to analyst predictions of a $0.77 loss. Yet, revenue came in below expectations at $231.2 million, down 1.8% sequentially due to challenges with the acquired Sprint Wireline customer base and declines in off-net and enterprise services.

Despite a slight improvement in adjusted EBITDA driven by cost reductions and a shift towards higher-margin on-net services, Cogent's wavelength business saw significant growth, yet Sprint Wireline runoff continues to impact overall sales. The company is actively working on refinancing $700 million of notes due in June 2027, underscoring the mixed performance of the firm, where profitability gains are undermined by mounting revenue pressures.