Extreme Networks (EXTR) Boosted By Upgrade

Posted on February 14, 2007

It´s always nice to get the Wall Street hype machine rallying behind our stock picks. So we were quite pleased this morning when Ryan Hutchinson, over at WR Hambrecht, upgraded Extreme Networks (EXTR) and published a 12 month price target of $6.50 per share for the stock.

Mr. Hutchinson had this to say about Extreme:

“We are upgrading EXTR shares to a Buy from a Hold rating and establishing a $6.50 price target based on 1.5x our C2007 EV/Revenue estimate. Our upgrade is based on our belief that the corporate reorganization that has been underway over the last six months is beginning to take hold. As expected, such turnarounds take time to materialize; to date, gains have been slight. However, we believe that under the new leadership of CEO Mark Canepa, the Company is at the brink of resuming a growth trajectory. Our recent meeting with CEO Mark Canepa reinforced this notion due to several actions Canepa has taken, including 1) focusing on key verticals; 2) realigning the product groups; 3) de-layering the management structure and adding key hires; and 4) reinvigorating the North American sales organization. Furthermore, with the option review nearly complete and EXTR shares trading at less than 1x our C2007 EV/Revenue estimate, we believe the risk/reward profile is compelling.”

As regards to the competitive environment that EXTR must face, Mr. Hutchinson had this very interesting piece of commentary:

“Our discussion with Canepa revealed much about his new strategy for approaching the Company’s traditional verticals-carrier and the enterprise. Within the carrier vertical, we believe the Company can ultimately compete for a sizable portion of the carrier Ethernet market, valued at $1.6B during 2007 by IDC. While the Company’s traditional carrier base has consisted of about two-thirds Tier II and one-thirds Tier I, we believe the Company will more aggressively pursue a few key Tier I accounts through OEM relationships, rather than head-on. On the enterprise front, we believe the most potential is coming from healthcare, hospitality/gaming, and education-sectors marked by transient usage populations that are well served by Extreme’s best-of-breed emerging wired/wireless platforms. Moreover, we believe the Company holds a strong competitive position in this market because it largely focuses on smaller implementations that are often overlooked by larger competitors like Cisco.”

Overall, with another analyst getting bullish on Extreme, it will probably not be long before other Wall Street firms begin upgrading shares of the company. Our view, for quite some time, has been that EXTR’s share price already reflects worst case scenarios, and with ample evidence to suggest that substantial positive business changes will be coming in the next year, the shares still have limited downside and substantial upside.

We would note, however, that we are more bullish on EXTR than Wall Street. We think that if the company continues to report improving financial results and US sales begin picking up, there is absolutely no reason why the company should trade at a substantial valuation discount to its peers. In fact, a valuation more in line with industry comps, would suggest a potential target price of $8 to $10 in the coming year, if results continue to improve. It´s also possible that the company´s large cash pile and stabilized revenue stream, will attract suitors from either larger competitors or private equity firms.

Please Note: We first recommended Extreme Networks (EXTR) at $4.22, and still hold a position in the stock. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

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