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Why Extreme Networks Inc. Shares Plunged

By Brian D. Pacampara, CFA – Feb 5, 2014 at 12:41PM

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Is this meaningful? Or just another movement?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of network equipment technologist Extreme Networks Inc. (EXTR 1.91%) plummeted 16% today after its quarterly results and outlook disappointed Wall Street.

So what: The stock has soared over the past year on better-than-expected growth, but today's Q2 results -- adjusted EPS of $0.14 on revenue of $148.3 million versus the consensus of $0.13 and $151.6 million -- coupled with downbeat guidance is forcing investors to quickly sober up. While the company continues to grow its top line at a breakneck pace (98% year over year), Mr. Market's reaction suggests that it isn't growing fast enough to justify its massive run in 2013.

Now what: Management now sees adjusted Q3 EPS of $0.01-$0.06 on revenue of $140-$155 million, versus the consensus of $0.08 and $152.6 million. "Our integration plans are on track," Extreme Networks CEO Chuck Berger said in reference to its recent purchase of Enterasys. "The senior management team for the combined Company has been established and announced and we continue to make steady progress toward a complete integration." So, while Extreme Networks might still be too speculative for average investors, its suddenly beaten-down stock and rock-solid balance sheet might provide enough downside protection for more enterprising Fools.

Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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