Extreme Networks Offers Attractive Valuation And Strong Growth Potential, Affirms Oppenheimer Analyst

Oppenheimer analyst Timothy Horan initiated coverage on shares of Extreme Networks, Inc. EXTR, with a price target of $35.

The analyst considers the company a significant enterprise Edge Cloud and AI beneficiary.

Horan thinks EXTR is attractively valued at 15x 2024E P/E, a ~25% discount to the market, with the ability to grow revenue and EPS greater than 14% and 18%, respectively, over the next five years.

The analyst notes that EXTR provides critical edge infrastructure and software enabling the convergence of compute, network, and security.

Security will be the first significant growth driver, especially zero-trust, the next year, followed by computing.

Overall, the analyst believes EXTR will see annual solid top-line revenue growth in the mid-to-high teens in the next several years, with gross margins improving by over 100 bps per year.

Margins will benefit from lower expedite fees and shipping costs paid to vendors as the supply chain loosens. 

EXTR has a strong balance sheet with only $34 million in net debt in 3Q'23, a leverage ratio under 1.0x, and over $1 billion in assets. 

The backlog is expected to remain elevated but stable during the next few quarters and will likely not normalize until the fiscal year 2025 or 2026, notes Horan.

The analyst adds that EXTR is the first enterprise networking company to support a "cloud continuum" that can unify public, private, and edge cloud deployments. 

However, EXTR mainly targets customers in the low-to-mid end market that its primary legacy competitor.

The analyst adds that EXTR has only ~5% market share but has been growing this 30bps+ per year.

On the negative side, EXTR is subject to supply chain issues, particularly to prolonged semiconductor chip shortages, the analyst cautions. 

The company has navigated industry-wide constraints, but sources select components from limited suppliers and lack long-term agreements with fixed pricing. 

Price Action: EXTR shares are trading higher by 6.36% to $24.26 on the last check Wednesday.