Extreme Networks, Inc. (NASDAQ:EXTR) and Super Micro Computer, Inc. (NASDAQ:SMCI) are the two most active stocks in the Networking & Communication Devices industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect EXTR to grow earnings at a 20.00% annual rate over the next 5 years. Comparatively, SMCI is expected to grow at a 15.00% annual rate. All else equal, EXTR’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Extreme Networks, Inc. (EXTR) has an EBITDA margin of 2.98%, compared to an EBITDA margin of 4.35% for Super Micro Computer, Inc. (SMCI). This suggests that SMCI underlying business is more profitable. EXTR’s ROI is -20.60% while SMCI has a ROI of 7.40%. The interpretation is that SMCI’s business generates a higher return on investment than EXTR’s.
The value of a stock is simply the present value of its future free cash flows. EXTR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.20. Comparatively, SMCI’s free cash flow per share was -0.24. On a percent-of-sales basis, EXTR’s free cash flow was 0% while SMCI converted -0.46% of its revenues into cash flow. This means that, for a given level of sales, EXTR is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. EXTR has a current ratio of 1.20 compared to 2.30 for SMCI. This means that SMCI can more easily cover its most immediate liabilities over the next twelve months. EXTR’s debt-to-equity ratio is 1.08 versus a D/E of 0.20 for SMCI. EXTR is therefore the more solvent of the two companies, and has lower financial risk.
EXTR trades at a forward P/E of 21.87, a P/B of 12.99, and a P/S of 2.03, compared to a forward P/E of 11.97, a P/B of 1.67, and a P/S of 0.52 for SMCI. EXTR is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. EXTR is currently priced at a -20.08% to its one-year price target of $13.00. Comparatively, SMCI is -19.23% relative to its price target of $33.80. This suggests that EXTR is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.00 for EXTR and 2.20 for SMCI, which implies that analysts are more bullish on the outlook for SMCI.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. EXTR has a beta of 1.17 and SMCI’s beta is 0.17. SMCI’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. EXTR has a short ratio of 1.88 compared to a short interest of 12.74 for SMCI. This implies that the market is currently less bearish on the outlook for EXTR.
Super Micro Computer, Inc. (NASDAQ:SMCI) beats Extreme Networks, Inc. (NASDAQ:EXTR) on a total of 8 of the 14 factors compared between the two stocks. SMCI is growing fastly, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, SMCI is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, AI has better sentiment signals based on short interest.