On Wednesday, KeyBanc Capital Markets shared their perspective on the shares of Communication Services sector, highlighting potential winners and losers as companies prepare to release their fourth-quarter 2024 earnings. KeyBanc analyst expressed optimism for Charter Communications (NASDAQ:CHTR), SBA (LON:SBA) Communications (NASDAQ:SBAC), Cogent Communications (NASDAQ:CCOI), and Warner Bros. Discovery (NASDAQ:WBD), anticipating these companies could outperform in 2025.
Nispel's analysis suggests that market sentiments regarding Internet subscriber trends for cable companies and leasing trends for tower companies have been overly pessimistic. He believes these trends are set to improve, which could reflect positively on the sector's performance. Conversely, he indicated caution towards Verizon Communications (NYSE:NYSE:VZ) and Equinix (NASDAQ:EQIX), where investor expectations may be too high.
Warner Bros. Discovery is seen by KeyBanc as having potential for meaningful upside. The analyst expects the company's Studios segment to show improved profitability and the Networks division to benefit from recent affiliate renewals, especially after the NBA's departure. Moreover, accelerated profitability in direct-to-consumer platforms could drive growth in adjusted EBITDA, which is not yet accounted for in the company's valuation.
Cogent Communications is highlighted for its potential in the AI thematic space through its Wavelength business. KeyBanc forecasts a tripling of Wavelength revenue in 2025 and a doubling in 2026. The firm also expects Cogent's core business to accelerate, bolstered by trends such as return-to-office, the shift of sports broadcasting to streaming, and significant pricing actions for IPv4.
For Charter Communications, KeyBanc anticipates improving Internet subscriber trends, modest growth in adjusted EBITDA, and a peak in capital intensity. These factors could support a free cash flow per share greater than $60 by 2027, suggesting the stock is currently undervalued.
In contrast, KeyBanc is cautious about Verizon, expecting the company to exhibit the lowest adjusted EBITDA growth among its peers in 2025, coupled with a decline in free cash flow due to investments. The acquisition of Frontier Communications (OTC:FTRCQ) (FYBR) is not expected to allow for incremental capital return to shareholders, further contributing to the firm's cautious stance.
Equinix also faces skepticism from KeyBanc, with the expectation that foreign exchange pressures will cause the company to miss consensus in the fourth quarter and continue to impact results in 2025. This could lead to Equinix falling short of its long-term guidance for the second consecutive year, indicating underlying challenges in the company's growth strategy.
In other recent news, Cogent Communications reported mixed financial results for the third quarter of 2024. The company's total revenue was $257.2 million, with an increase in EBITDA to $60.9 million. Despite a revenue decline due to the reduction of low-margin off-net connections and a decrease in the T-Mobile commercial services agreement, Cogent realized significant cost savings from the Sprint Global Markets acquisition and experienced a surge in wavelength and IPv4 leasing revenue.
UBS initiated coverage on Cogent Communications with a Buy rating, anticipating growth from its acquisition of Sprint's wireline assets. The firm projects an increase in performance for 2025 and beyond as network reconfiguration efforts are finalized. UBS also forecasts over $500 million in EBITDA for Cogent by 2028, exceeding current street estimates.
Other recent developments include Cogent's plans to add over 100 carrier-neutral data centers annually for the next several years, focusing on serving small and medium-sized businesses in North American multi-tenant office buildings and expanding profitable services for large enterprise customers. Despite an 18.2% year-over-year decline in enterprise business revenues and a 14.8% decrease in off-net revenue, transactions related to data center leases or sales are expected before June 2025.
KeyBanc's analysis is based on recent management commentary, discussions with companies, and updated views on market expectations, as they prepare for the upcoming earnings announcements.
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