6. Cogent Communications Holdings Inc. (NASDAQ:CCOI)
Number of Hedge Fund Holders: 27
Cogent Communications Holdings Inc. (NASDAQ:CCOI) is a leading provider of high-speed internet, private network, and colocation services. It caters primarily to bandwidth-intensive businesses, including law firms, financial institutions, and other professional services, as well as other internet service providers. Its services include on-net and off-net internet access, private network solutions, and data center colocation space.
The earlier acquisition of Sprint Global Market’s wireline business by Cogent Communications Holdings Inc. (NASDAQ:CCOI) helped the company achieve $165 million in cost savings, representing 75% of the targeted $220 million in annual cost reductions, as of Q3 2024. The acquisition has expanded its network reach through the integration of 43 acquired Sprint facilities, increasing the total data center count to 95.
It also enabled the company to expand its service offerings to include optical wavelength services, which are now available in 200+ locations and are expected to expand to 800+ locations by the end of 2024. Cogent Communications Holdings Inc. (NASDAQ:CCOI) is well-positioned to capitalize on emerging market opportunities and solidify its position as a leading player in the telecom industry.
Alphyn Capital Management stated the following regarding Cogent Communications Holdings, Inc. (NASDAQ:CCOI) in its Q3 2024 investor letter:
“In its latest earnings release, Cogent Communications Holdings, Inc. (NASDAQ:CCOI) reported steady, albeit unspectacular, performance in its core operations. There has been some progress on extracting cost synergies from the Sprint acquisition, and there is some potential for value creation through monetizing “hidden assets” from its IPv4 and data center co-location fees. The company has made progress in realizing cost synergies from the spring acquisition and may unlock additional value by monetizing “hidden assets” such as its IPv4 holdings and data center co-location fees. However, the crux of the investment thesis remains the potential for significant revenue growth from waves. Without this catalyst, I believe the stock could drop to the low $60s, but with waves revenues materializing, the upside potential could exceed $150.
It is interesting to see what happened with Lumen, a competitor to Cogent, after announcing a $5 billion deal to build a custom network for Microsoft’s data centers on July 24th. The stock jumped from around $1.50 to approximately $7 per share. From my understanding and based on reading a short seller report,2 Lumen is primarily acting as a contractor in this deal, and it is estimated to retain only $800 million in one-time profits from construction and only $21 million in recurring profits.
In contrast, Cogent has the potential to generate over $500 million in recurring operating profits3 if it can successfully sell its wave revenues over the next few years. The capital expenditure is much more limited, as Cogent is connecting an existing infrastructure that all its customers can use instead of a bespoke construction for just one customer. While I don’t expect the same dramatic market reaction as Lumen’s, Lumen’s stock rally was partly due to relief from its potential bankruptcy risk as the influx of cash will help manage its substantial $18 billion debt; I do think this situation reflects the market’s appetite for companies providing infrastructure critical to AI and cloud development.”
