Is Extreme Networks' forecast a sign of industry woes?

Key Points

• Extreme Networks saw a significant drop in stock price following better-than-expected Q1 results accompanied by disappointing guidance.
• CEO Ed Meyercord attributed the slowdown to macro-environmental trends like recession, rising interest rates, and economic challenges.
• Despite the stock's selloff, analysts maintain a "hold" view with a price target of $29.75, indicating continued potential for the company's growth.

Was Extreme Networks’ NASDAQ: EXTR disappointing revenue guidance a harbinger of what’s to come in the networking industry, or is there a company-specific problem? 

“As far as slowed growth, we are seeing it across the industry,” Extreme Networks CEO Ed Meyercord told MarketBeat. 

He added that macro-environmental trends like recession, growing interest rates and economic challenges in key regions are having an impact.

Extreme Networks’ stock gapped down 13.39% on November 1, after the company reported better-than-expected fiscal first-quarter results. MarketBeat’s Extreme Networks earnings data shows the company beating both top and bottom-line views.

Biggest decliner in networking industry

Within the computer networking industry, Extreme Networks was the biggest daily percentage decliner. The stock’s slide didn’t spread to industry peers Cisco Systems Inc. NASDAQ: CSCO or Arista Networks Inc. NASDAQ: ANET, which rose 5.23% after a blockbuster, AI-driven earnings report. 

Quarterly revenue of $353.1 million represented a 19% increase over the year-earlier quarter. Earnings of 35 cents a share were up 75%.

That’s not bad at all, and would seem to make investors happy.

But that’s not where the story ends. 

Investors not happy with the forecasts

The part where the company talked about future revenue and earnings didn’t go so well.

In the current quarter, Wall Street was looking for earnings of about 37 cents a share on revenue of approximately $368 million.

Extreme Networks guided toward revenue in a range between $312 million and $327 million. 

It forecast earnings between 26 cents a share and 31 cents a share. 

That didn’t make investors happy, resulting in the selloff.

Meanwhile, large-cap tech stocks, as tracked by the Technology Select Sector SPDR Fund NYSEARCA: XLK, were up 1.93% in the session.

"Slowdown in decision making"

Meyercord said the reduced guidance wasn’t due to customers slashing spending, but rather to “a slowdown in decision making and demand.” 

He added this market cycle is similar to what the company witnessed at the beginning of Covid. 

“Spending and decision are going through additional layers of approval and customers are running their networks hotter,” Meyercord said. “Given the current uncertainty of the macro environment and the fact that our channel partners are working through the delivery of a significant amount of backlog which requires deployment, we expect it to take a few quarters to normalize.”

He noted that Extreme Networks’ ability to take market share from some of the biggest players in the industry remains promising. 

Number of bigger deals growing

“We continue to see the number and size of deals over $1 million grow each quarter,” he said. “They come to Extreme because they are tired of the complexity and inflexibility of the bigger players in the market.”

Following the earnings report, two analysts downgraded the stock, as you can using MarketBeat’s Extreme Networks analyst forecasts. The consensus view of the stock is “hold,” with a price target of $29.75, an upside of 66.57%. 

 

That suggests that analysts still see the potential in the company, and are understanding the picture that Myercord is painting, particularly with regard to the comparisons to the early days of the pandemic.

Myercord says the company’s funnel of opportunities to grow and is up double-digits on a year-over-year basis.

“We expect demand to stabilize over the next several quarters and our outlook for fiscal year ‘24 calls for mid-to-high single-digit revenue growth, above industry analyst expectations for our market,” he said. 

Resuming double-digit growth

“We cannot control the macro environment but the competitive position we are in, new go-to-market and product/strategic initiatives will allow us to resume double-digit growth,” he said.

He added that the company expects high-teens operating margin in the current fiscal year, which will allow the company to grow earnings per share by over 25% during the year. 

There may be a distinct factor at work with Extreme Networks’ selloff: Investors often sell stocks due to sentiment-driven factors. Perceptions of market events can lead to a spike in trading. In this case, investors may be looking for evidence of a slower economy, and used that as an excuse to sell off the stock.

Was the selloff overdone? We’ll find out soon, if it finds a floor in a relatively short time and resumes its rally.