Extreme Networks gets rating cuts at Wall Street after quarterly results show

Extreme Networks' (NASDAQ:EXTR) was downgraded by Rosenblatt Securities and UBS after it reported second-quarter results on Wednesday.

Analysts at Rosenblatt downgraded the stock to Neutral from Buy and cut the price target to $15 from $19, noting Extreme's report was a mix of good and bad news with more bad than good.

On the positive side, bookings are improving, the decks are cleared on backlog and channel inventory, software-as-a-service growth is strong, and Juniper (JNPR) which had grabbed the top spot in Enterprise momentum, will most likely be hobbled by the pending acquisition by HP Enterprise (HPE), according to the analysts. HP Enterprise could also lose share at an accelerated rate due to customer concerns about uncertainty.

The downgrade happened because there are not many exciting near-term catalysts in the Enterprise Unified Access and Cloud space and not due to the disappointing guidance for the March quarter, the analysts said.

The company believes it can regain normalized 10% plus revenue growth in fiscal 2026, however history suggests that 5% may actually be normal, according to the analysts.

Meanwhile, UBS cut Extreme's rating to Neutral from Buy and lowered the price target to $14 from $22, as demand is waning and inventory digestion weighs on results.

The concern is that spending in the networking industry across Campus/WLAN will decline sharper than expected for the balance of calendar 2024, UBS analysts said.

Due to the order pressure over the next four quarters, the analysts think Extreme's run-rate revenue expectations need to be reset to, at best, about $1.1B. Moreover, run-rate operating margin guide of 10% to 13% exiting the June '24 quarter is more indicative of long-term profitability compared to the recent around 15% margins.

This would imply trough 'earnings power' of $0.78 per share, the analysts said.

While not a traditional cyclical company, the analysts think the market is likely to assign a higher multiple than normal on what should be trough earnings given the uncertainty and earnings volatility.

Extreme Networks (EXTR) has a Strong Sell rating at Seeking Alpha's Quant Rating system, which consistently beats the market. Meanwhile, the Seeking Alpha authors' average rating is more positive with a Buy as is the average Wall Street analysts' rating Buy.