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Why Extreme Networks Dropped 15% in February

By Jon Quast - Mar 3, 2020 at 4:27PM

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The company's slow revenue growth and unprofitability sent investors running as the market turned red.

What happened

It was a painful month for investors of Extreme Networks (EXTR 0.34%). The stock was down 14.7% in February, according to data provided by S&P Global Market Intelligence. But it was actually even more "extreme" than that. Consider that the stock rose for the first half of the month, but after reaching a high of $6.71 on Feb. 13, it tanked 25%, to end the month at $5.03 per share.

The drop-off wasn't isolated to Extreme Networks. Fellow networking-company Arista Networks (ANET -0.35%) similarly dropped 14% in February. But its drop was in two stages -- once from poor earnings, and then due to the overall market correction. Extreme Networks' drop, by contrast, corresponds perfectly to the market's fastest 10% drop ever. 

A fist slams on a table as a tablet shows a crashing stock chart.

Image source: Getty Images.

So what

A global health crisis like the COVID-19 coronavirus outbreak has an obvious ripple effect across various economic sectors like consumer goods, manufacturing, and travel. A technology business, and specifically a computer-networking specialist, would seem less susceptible to the coronavirus outbreak than others. Indeed, on the market's worst day in February, several technology stocks were among the very few winners.

But that doesn't mean investors are behaving irrationally by selling Extreme Networks. In January, the company provided results from its second quarter of fiscal 2020, and sales were below its expectations for the third straight quarter. Q2 revenue was up 6% to $267.5 million, but management attributed this to its acquisition of cloud-network company Aerohive Networks. The company's lack of organic growth and profits (it lost $24 million in Q2) are legitimate reasons for investor hesitation, and they're likely why the stock promptly sold off by 10%.

As previously stated, the stock was recovering from this earnings dud before the broad market sell-off dragged it down further. In times of market volatility like now, investors shy away from companies considered higher risk (slow growth and unprofitable), preferring a steadier boat to weather the storm. 

Now what

While there are legitimate reasons for concern, there's also reason for optimism. Extreme Networks reorganized its international business recently and expects that will cut costs and boost profitability in the second half of 2020. The company is also launching new products that will make it easier to license its software, which it believes can contribute to organic revenue growth of low single digits later in the year. 

Any improvements in revenue growth or profitability would be a welcome sign for investors. But at this point, given the company's past underperformance, an Extreme Networks' investment is more speculative than I'm personally comfortable with.

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Stocks Mentioned

Extreme Networks, Inc. Stock Quote
Extreme Networks, Inc.
EXTR
$8.95 (0.34%) $0.03
Arista Networks, Inc. Stock Quote
Arista Networks, Inc.
ANET
$93.41 (-0.35%) $0.33

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