EXTR - Extreme Networks stock sinks after Craig-Hallum downgrade on CDW market warning

2023-04-19 14:15:21 ET

Extreme Networks ( NASDAQ: EXTR ) shares tanked as much as 20.3% on Wednesday after Craig-Hallum downgraded the network equipment services provider to Hold from a prior investment rating of Buy, along with a price target cut.

Craig-Hallum trimmed its PT to $17.50/per share from $22, and also changed its fundamental trend rating to "mixed" from "improving".

The brokerage changed its stance on EXTR after learning that larger rival CDW ( CDW ) had drastically reduced U.S. IT spending for 2023, and warned that spending in the market is now estimated to be down in high-single digits year-over year in 2023, from its previous expectation of flat year-over-year.

"We are surprised by the magnitude of the more cautious spending outlook shift, which in turn makes us more cautious regarding Extreme Network’s previous outlook for the company’s demand to remain strong and its backlog to remain stable for several quarters before beginning to be worked down, as well as for previous expectations of the company’s strong backlog of $542 million to take until the end of FY25 (Jun) to return to normalized sub-$100 million levels," analysts at Craig-Hallum wrote in their latest research report.

The analysts said the downgrade and PT cut was based on 12x of FY24 EPS estimate of $1.45, and justified that a 12x P/E multiple is in line with the company’s 5-year historical forward P/E. Craig-Hallum previously expected a 15x price target P/E multiple for EXTR.

If current losses hold, EXTR will wipe off all 2022 gains.

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