Extreme Networks Stock: A Minimal Player in a Competitive Market

 

 

This article was written by Mingyue Liu, a Financial Analyst at I Know First.

Extreme Networks Inc. SWOT Analysis

“The Internet of Things tell us that a lot of computer-enabled appliances and devices are going to become part of this system, too: appliances that you use around the house, that you use in your office, that you carry around with yourself or in the car. That’s the Internet of Things that’s coming.” (by Vinton Gray Cerf)

Summary:

  • SWOT Analysis
  • Analyst Bullish Forecast
  • I Know First Bullish Forecast on EXTR

Extreme Networks, Inc. (Extreme) provides networking solutions for enterprise applications. It carries out design, development, and manufacture of wired and wireless network infrastructure equipment. The company also provides maintenance, and customized training services to its customers. The company was founded in 1996, with its headquarter in San Jose, California.

Extreme Networks Analysis

SWOT Analysis

  • Strengths:

1. Strong Positive Cash Flow Generation

The company has consistently generated strong positive free cash flow. Except for 2014, when Extreme reported a negative number. It was largely due to the acquisition of Enterasys, which caused over $25 million acquisition & integration costs, higher sales & marketing expenses, and higher R&D costs. After adjusting for the acquisition, free cash flow generation implies a robust core business operation.

2. Robust Research and Development Capabilities

In May 2016, Extreme Networks, Inc. introduced its cloud-managed networking platform, ExtremeCloud, specially designed for zero-touch provisioning and management simplicity.

In October 2016, Extreme launched industry’s first Wave 2 Wireless AP with integrated surveillance camera to deliver enhanced visibility and control, meanwhile, with significantly lower costs.

Extreme Networks Analysis

Source: Extreme Networks

3. Strategic Acquisition and Partnership

Extreme Networks Analysis

On October 31, 2016, the company announced the accomplishment of acquiring wireless LAN business from Zebra Technologies. The acquisition was believed, by the management, to be able to not only improve existing services but also significantly expend Extreme’s WLAN offering business.

In November 2016, Extreme Networks partnered with the New England Patriots (an American football team) to utilize its advanced flow-based 802.11ac Wave 2 wireless technology. The company uses 802.11ac Wave 2 Access Points (Aps) to address the network demands driven by mobility, smart devices and the rapidly expanding IoT. Its unique flow-based technology allows new Aps to deliver location-based application analytics while providing upgraded speed and enhanced security.

On March 31, 2017, the company announced that it has won the bid to acquire Avaya’s networking business. This acquisition is expected to help Extreme provide a broader set of networking technologies and capabilities.

In March 2017, Extreme announced the plan of acquiring the SRA assets of Brocade Communications Systems, with the aim of enhancing its data center technology portfolio and strengthening its position in the competitive market. This acquisition is scheduled to take place in August 2017.

At the same time, Extreme entered into a strategic alliance with National Hockey League’s Carolina Hurricanes to deliver high-density Wi-Fi at PNC Arena in Raleigh, North Carolina, the US.

  • Weaknesses:

1. Holder of Small Market Share.

Extreme Networks accounts for only 0.3% of the communication infrastructure market of 2017, with expected fiscal year revenue of $530 million versus the estimate market revenue of over $52 billion.

2. Experienced Seasonal Fluctuation

According to the management disclosure at 2016 SEC report, Extreme has, same as many of its competitors, historically experienced seasonal fluctuations. This was largely contributed to customer spending patterns, which generally laid negative impact on the first and third fiscal quarters.

3. Negative Return on Tangible Capital Employed

The company has reported operating loss for a consecutive three-year period, indicating the inability to cover operating costs with gross profits.

 

4. Limited Bargaining Power

As a minimal player with less than 1% of total market share, Extreme has very limited bargaining power against customers. Besides, due to the intense competition from its competitors, Extreme is expected to remain, if not to decrease, the pricing level in the future.

  • Opportunities:

1. Growing Demand for Cloud Computing

According to Infocomm Development Authority of Singapore (IDA), the global market for cloud computing would reach $241 billion by 2020. Extreme has launched ExtremeCloud at the end of 2016 to provide solutions to organizations to address their need for data storage.

2. Increasing Demand for Bandwidth

There is a constant demand for greater network performance. With the quick expansion of electronic devices in daily lives, as well as enterprises’ need for efficient operating systems, the market for Ethernet switches and solutions is expected to grow in the future.

3. Increasing Demand for IoT

According the Ericsson Mobility Report, the market for IoT devices is expected to grow significantly. Of the estimate 29 billion connected devices by 2022, 18 billion would be related to IoT.

Extreme Networks Analysis

Source: Ericsson Mobility Report

4. Market stability: Shifting in favor, with the characteristic of rapid change.

Technology industry is growing yet subject to rapid changes. Success of the company is largely dependent on its ability to capture the changes and innovate.

  • Threats:

1. Losing Market Share

Extreme is losing market share to its competitors, implied by the decreased revenue from FY2015 to FY2016. However, it is reasonable to believe situation would better with the pending acquisition of Avaya assets and the SRA (Switching, Routing and Analytics) assets of Brocade.

2. Strengthening of US dollar

The strengthening of US dollar, compared to other currencies, pushed up the price of products and services, which would either force a lower sales volume or a lower gross margin.

3. Intense Competition Landscape

The industry is labeled as both competitive and fast-changing. In order to compete effectively, the company must constantly introduce new products to cater for new demands. Launch of new products would cannibalize the existing products and services. At the same time, Extreme risks failing to adept to the rapid changing environment.

Extreme Networks Analysis4. Unfavorable Lawsuits against the Company

Internet industry is subject to strict laws and regulations regarding patents, copyrights and intellectual property rights. Patent infringement lawsuits against the company could have a material negative impact on the business.

Conclusion:

The stock price of Extreme is expected to be bullish in the short time. With the process of acquiring Avaya and Brocade, EXTR would be strongly supported.

Extreme Networks Analysis

Past I Know First Forecast Successes with EXTR:

In such as the one dated on May 7, 2017 the algorithm accurately forecast a signal for Extreme Networks. In a span of 1 month, the stock rose by 17.73%, beating the S&P 500 return of 1.41%.  The market premium calculates to an astounding 16.32%.

Extreme Networks Analysis

Below is the latest forecast I Know First algorithm released as of today on June 8, 2017.  If we were to compare the forecast released to I Know First subscribers in May 7, 2017, we can see both forecasts rate EXTR as a buy.  If the previous forecast on May 7, 2017 accurately predicted the stock would increase and it did by over 17%, the latest forecast below could indicate another high rate of return.

The predictability increases in the long term, indicating that Extreme is a strong investment in the short term.

Extreme Networks Analysis

This bullish forecast on EXTR was sent to the current I Know First subscribers on June 8, 2017

I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go. (positive = to go up = Long, negative = to drop = Short position). The signal strength relates to the magnitude of the expected return. We use the signal strength for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm. It allows the user to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to fill confident about/trust the signal.

Extreme Networks Analysis

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Extreme Networks Analysis