Analysts See Zayo Group Boosting Market Share

Zayo Group Holdings Inc ZAYO which raised about $400 million last month in an initial public offering, is one of few ways to play the theme of growing bandwidth demand, an analyst said Wednesday.

The company offers fast growth in recurring revenue along with relatively high margins, according to Morgan Stanley's Simon Flannery.

Moreover, Flannery sees and the opportunity for Zayo to make further acquisitions in an industry that has seen sweeping consolidation since the days of overcapacity more than a decade ago.

With the expiration of the company's post-IPO quiet period, Flannery launched coverage on Zayo with an Overweight rating and $28 target.

Zayo rose nearly 5 percent Wednesday to $26.77, up more than 20 percent since its IPO.

Zayo, which owns one of the largest fiber networks in the United States, has made no secret of its thesis that the proliferation of mobile broadband, streaming video and cloud computing are fueling a growth spurt in bandwidth demand.

The company notes, for example, that video streaming represents 50 percent of Internet traffic at peak hours. Yet online viewing still only represents 5 percent of the time viewers spend watching traditional TV, according to Zayo, which cited Nielsen figures.

Zayo also may stand to gain as wireless carriers add more capacity for broadband mobile, and need to link their growing network of towers and cells to the Internet.

Zayo has picked up 32 companies in the past seven years, and although opportunities are dwindling in the U.S., it's recently branched out into Europe, where Flannery sees further potential.

Zayo posted fiscal 2014 revenue of$1.1 billion, but its loss widened to $179 million and the company doesn't expect profits for at least several more years.

Davidson's James G. Moorman notes that Zayo's debt of more than $3 billion makes it highly leveraged relative to earnings outlook, while its capital spending demands run at more than 30 percent of its revenue.

Moreover, its largest single customer accounted for 7 percent of fiscal 2014 revenue while its top 10 customers accounted for 30 percent, Moorman said.

Many of those same customers are also competitors for some or all of Zayo's service offerings.

But Moorman launched coverage with a Buy rating and $28 target, citing Zayo's growth prospects and potential for widening its profit margins.

Citi's Michael Rollins initiated with a Buy and $30 target, saying the company is "well positioned to take share" in a growing market.