Extreme Networks Inc (EXTR, Financial), a provider of software-driven networking services, experienced a daily loss of 12.71% and a 3-month loss of 33.66%. Despite these losses, the company reported an Earnings Per Share (EPS) of 0.58. This raises the question: is the stock modestly overvalued? This article will delve into a detailed valuation analysis of Extreme Networks, providing insights to help you make informed investment decisions.
Company Overview
Extreme Networks Inc (EXTR, Financial) offers software-driven networking services for enterprise customers. Their product line includes wired and wireless network infrastructure equipment and software for network management, policy, analytics, and access controls. The company's high-density Wi-Fi, centralized management, cloud-based network management, and application analytics capabilities have made it a significant player in the networking industry.
With a market cap of $2.30 billion and a stock price of $18 per share, Extreme Networks (EXTR, Financial) is considered modestly overvalued based on the GF Value of $15.39. This valuation is derived from a combination of historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates.
Understanding GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line represents the stock's ideal fair trading value. If the stock price is significantly above the GF Value Line, it is considered overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on GuruFocus' valuation method, Extreme Networks (EXTR, Financial) appears to be modestly overvalued. Given this, the long-term return of its stock is likely to be lower than its business growth.
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Financial Strength
Before investing in a company, it's crucial to assess its financial strength. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage are excellent indicators of a company's financial strength. With a cash-to-debt ratio of 0.89, Extreme Networks' financial strength is fair, ranking 6 out of 10, although it lags behind 58.61% of 2370 companies in the Hardware industry.
Profitability and Growth
Investing in profitable companies is generally less risky, especially those that have demonstrated consistent profitability over the long term. Extreme Networks has been profitable 3 times over the past 10 years. The company had a revenue of $1.30 billion and an Earnings Per Share (EPS) of $0.58 over the past twelve months. Its operating margin is 8.5%, which ranks better than 70.99% of 2451 companies in the Hardware industry. However, Extreme Networks' profitability is rated 4 out of 10, indicating poor profitability.
Growth is a crucial factor in a company's valuation. Extreme Networks' 3-year average revenue growth rate is better than 59.02% of 2328 companies in the Hardware industry. However, its 3-year average EBITDA growth rate is 0%, which ranks worse than 0% of 1957 companies in the Hardware industry.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) to the Weighted Average Cost of Capital (WACC) is another way to determine its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Extreme Networks' ROIC is 9.9, and its cost of capital is 17.04.
Conclusion
Overall, Extreme Networks (EXTR, Financial) stock appears to be modestly overvalued. The company's financial condition is fair, but its profitability is poor. Its growth ranks worse than 0% of the companies in the Hardware industry. To learn more about Extreme Networks stock, you can check out its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
