On Monday, B.Riley raised its rating on Extreme Networks (NASDAQ:EXTR) stock from Neutral to Buy, setting a price target of $14.00. The upgrade comes amid signs of channel inventory normalization and a rebound in demand.
A significant distributor for Extreme Networks, TD Synnex (SNX), which contributed to 18% of EXTR's revenue in fiscal year 2023, reported a positive outlook during their first fiscal quarter earnings call in late March. SNX management indicated a stabilized demand environment with expectations of continued improvement throughout the year.
TD Synnex anticipates the second half of their fiscal year, ending in November, to be stronger than the first half. They also reported a substantial decrease in inventories to $7.1 billion in the first fiscal quarter of 2024, a 28% drop from the peak in the second fiscal quarter of 2022.
This aligns with Extreme Networks' expectations that excess channel inventories would be cleared out in the third fiscal quarter of March. Extreme Networks has been cautious, providing a conservative third fiscal quarter revenue outlook ranging from $200 million to $210 million.
Extreme Networks' stock has seen a significant downturn year to date, falling approximately 40%, in stark contrast to the Nasdaq's rise of 9.5%. Consequently, shares are currently trading at only 1.2 times revenue. This represents nearly a 50% discount compared to Juniper Networks (NYSE:JNPR), Extreme Networks' closest competitor. B.Riley anticipates that Extreme Networks' market multiple will increase as the company experiences revenue growth driven by the improving demand.
The firm's price target of $14 for Extreme Networks is derived from maintaining an enterprise value-to-sales multiple of 1.6 times the firm's fiscal year 2025 revenue estimate, plus net cash. With the current market conditions and the positive outlook from one of its major distributors, B.Riley believes that the risk/reward profile for Extreme Networks is attractive at the current share price levels.
InvestingPro Insights
Extreme Networks (NASDAQ:EXTR) has been navigating a challenging market, as reflected in the stock's recent performance. According to InvestingPro data, the company's market capitalization stands at $1.38 billion, with a P/E ratio of 17.19. This valuation becomes more intriguing when considering the adjusted P/E ratio for the last twelve months as of Q2 2024, which is at 14.89, indicating a potentially undervalued stock in terms of near-term earnings growth. Additionally, Extreme Networks operates with a moderate level of debt and is trading near its 52-week low, which could signal a buying opportunity for investors looking for undervalued tech stocks.
InvestingPro Tips highlight that Extreme Networks boasts a perfect Piotroski Score of 9, suggesting strong financial health. Furthermore, the management's aggressive share buyback strategy and the company's high shareholder yield are key points that could appeal to investors seeking companies with proactive capital return policies. It's important to note that while analysts have revised their earnings downwards for the upcoming period, they also predict the company will be profitable this year, which is consistent with the firm being profitable over the last twelve months.
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