EXTR - Extreme Networks stock dips after B. Riley cuts rating on valuation
2023-08-03 10:04:57 ET
B. Riley Securities downgraded Extreme Networks ( NASDAQ: EXTR ) to Neutral from Buy based on valuation and raised the price target to $30 from $25.
The company had reported its Q4 results on Wednesday which had surpassed estimates.
B. Riley's analysts said that despite the company's strong print and solid outlook, they were downgrading the stock, as shares are at their revised target of $30 (up from $25).
Besides valuation, the analysts' intermediate worry is on the company's eroding backlog, which is expected to be normalized to $75M to $100M by FQ1'25. This implies that EXTR will be shipping more than its bookings in FY24.
In addition, the analysts added that they could argue even FY24's mid-teens growth target could be in danger if the U.S. economy enters into a recession. Service providers are behaving as if the economy is already in a recession, because they have slowed down their spending. It remains to be seen if enterprise customers will follow service providers' lead.
In addition the analysts said that IT services and consulting company CDW expects US IT spending to be down HSD in 2023. Even though this trend will not necessarily affect sales since EXTR is able to convert backlog to revenue, it could affect bookings.
The firm noted that even though EXTR has several growth catalysts such as market share gains, there is risk that these catalysts may not be compelling enough to steer mid-teens growth as management anticipates in a recessionary environment.
The analysts think EXTR's risk/reward, especially after a significant appreciation since early May, along with macro factors, is no longer favorable to maintain a Buy rating.
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Extreme Networks stock dips after B. Riley cuts rating on valuation