With an increasing dependence on technology globally, the technology infrastructure space is becoming more prominent. A case in point is Extreme Networks, Inc. (EXTR - Get Rating). This cloud-driven networking solution and infrastructure major is benefiting immensely from its diversified product portfolio and various end-market applications.

EXTR serves more than 50,000 customers globally, supporting their efforts to accelerate their digital transformations with its ExtremeSwitching portfolio, network access control solution ExtremeNAC, and wired and wireless cloud network management solution ExtremeCloud. The stock has returned a whopping 136.6% over the past six months.

However, we believe that the market has not yet priced the true potential of EXTR and that the stock is currently undervalued.

Let’s take a closer look at why EXTR could be a solid value investment:

Robust Financials

Last month, EXTR presented solid financial metrics for its fiscal second quarter, ended December 31. The company delivered  $242.1 million in total revenue, increasing 3% sequentially, driven largely by wider adoption of its innovative cloud networking solutions and newly released universal hardware platform. Its adjusted gross margins were a record 61%, driven by  its  third consecutive quarter of improvement in product gross margin.

Its ExtremeCloud IQ cloud platform is becoming more pronounced with nearly 1.5 million connected networking devices, rising 8% sequentially, and active customer accounts improving 4% sequentially, and new cloud subscription bookings growth of 140% year-over-year.  Further, EXTR further reported an adjusted EPS of $0.13, compared  to $0.09 in its preceding quarter. .

Innovating Product Pipeline

In its  second-quarter earnings call, EXTR’s management stated that one of the prime factors influencing the company’s  strong revenue growth is its focus on developing innovative, next-generation technologies to lead the next market transition. In words of CEO Edward Meyercord, “We have a wide range of new product introductions set for the next calendar year to expand our universal products platform with cloud-native management for switches on a truly unified cloud platform.”

In addition to implementing new cost-saving designs, EXTR plans to embed licenses for  its cloud-based network management tools  in its new products line, thereby generating renewable subscription-style payments with  each hardware package.

Slated Growth for 2021

EXTR served a record 39 customers that spent more than  $1 million in its  last reported quarter. EXTR’s management expects its enterprise businesses’ momentum to accelerate this year, fueled by the continued strength in government and education spending and  a recovery in other verticals that were negatively impacted by the COVID-19 pandemic. In fact, its shipping costs are retreating from  elevated levels during the onset of the public health crisis because  supply chain issues forced the company to seek  alternative channels for product shipments.

Attractive Valuations

In terms of forward p/e, EXTR is currently trading at 18.09x, which is 32.8% below the industry average  26.94x. In terms of its trailing-12-month p/s, EXTR’s 1.26x is significantly lower than the industry average  4.45x.

In terms of trailing-12-month price/cash flow also, EXTR’ 15.10x is 33.3% below the industry average  22.63x.

POWR Ratings Indicate Promising Prospects 

EXTR has an overall B rating, which equates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. Among  these categories, EXTR has a Value Grade of A, which is justified by the stock’s lower-than-industry valuation ratios discussed here.

EXTR has a B grade for Growth, consistent with analysts’ expectations of robust financial growth. EXTR has a B grade for Quality also, which represents the company’s strong fundamentals. Of the 54 stocks in the B-rated Technology – Communication/Networking industry, EXTR is ranked #5.

Beyond what I stated above, we have also  given EXTR grades for Momentum, Stability and Sentiment. Get all the EXTR ratings here.

Better than EXTR: Click here to learn about top-rated Technology-Communication/ Networking stocks.

Bottom Line

EXTR is well positioned in the networking infrastructure space and should continue to see rising demand for its solutions. The strong growth of EXTR’s cloud subscription bookings is poised to increase its recurring revenue this year. As a result, management expects subscription and support revenue contribution to the overall top-line to improve this year.

These trends, combined with emerging new opportunities in 5G and edge computing, position EXTR well for accelerated long-term growth. Its Average Broker Rating of 1.71 indicates favorable analyst sentiment. Of the seven  Wall Street analysts that rated the stock, four have given it a Buy rating. Analysts expect the stock to hit  $12.10 in the near term, which indicates a potential upside of nearly 20%. Hence, we believe EXTR is a good bargain right now.

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EXTR shares were trading at $9.65 per share on Wednesday morning, down $0.05 (-0.52%). Year-to-date, EXTR has gained 40.06%, versus a 5.52% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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