• Home
• About Us
• Contact Us

Extreme Networks Disappoints, But We’re Still Bullish

Posted on April 28, 2007

Last week, Extreme Network’s (EXTR) announced disappointing financial results, which prompted significant selling in the stock. Despite generating nearly $10 million in cash during the quarter, the company’s top-line remained under pressure.

However, we still believe that the new management team at Extreme is taking the right steps to turn the company around. Importantly, years of bad management, cannot be rectified in just two quarters.

We also still think our investment in Extreme has low risk, with the potential for substantial upside, given the company’s very depressed valuation and solid balance sheet (i.e. EV/Sales of 0.8X and $214 million in cash and no debt). In fact, at current prices, we are surprised that the company has not yet become an acquisition target.

Interestingly, Foundry (FDRY), a company often used as the best comp for Extreme, hit a new high recently on improving results. FDRY is trading at a little over 2X EV/Sales and is sitting on nearly $900 million in cash. Perhaps Extreme (EXTR) should consider a combination with Foundry (FDRY)? Might deal activity for either of these companies accelerate once the two companies finally finish their accounting restatements?

In any case, “The Market” still remains pessimistic on EXTR, because investors believe there is no hope for EXTR against formidable competitors, like CSCO and a revived FDRY. However, we think that given the size of the end market, this line of thinking is simply way too pessimistic, and more importantly is already well reflected in the current valuation.

With a very strong cash position, exceptional technology, a solid customer base, and extensive channel partnerships, time is on the side of EXTR. Notably, share prices for depressed companies, like Extreme, can turn on a dime, once the positive personnel and strategic changes begin to show up in the financials. EXTR’s stock could also get a nice boost when the company finalizes its accounting restatements and refiles with the SEC in the coming months.

Our upside scenario for EXTR remains $8 to $10, or about 2.5 EV/Depressed Sales. With think this valuation is reasonable given the growth opportunity here and the company’s 50%+ gross margins. On the downside, we don’t see the stock going beneath $4, even under a worst-case scenario of continued lackluster growth. With 5% Downside and the Potential for 100% Upside, we think this stock remains an attractive investment gamble, even if one assigns a greater probability to the downside scenario because of the CSCO factor. The next few quarters will either vindicate or disprove our thesis.

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.

RSS Feeds:

Disclaimer:
This site may include market analysis and we may own shares in the stocks mentioned in our reports. 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.

Comments