Extreme Networks, Inc. (NASDAQ:EXTR) Looks Just Right With A 30% Price Jump

Extreme Networks, Inc. (NASDAQ:EXTR) shares have had a really impressive month, gaining 30% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 41%.

Although its price has surged higher, there still wouldn't be many who think Extreme Networks' price-to-sales (or "P/S") ratio of 2x is worth a mention when it essentially matches the median P/S in the United States' Communications industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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Check out our latest analysis for Extreme Networks

How Extreme Networks Has Been Performing

While the industry has experienced revenue growth lately, Extreme Networks' revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

Keen to find out how analysts think Extreme Networks' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Extreme Networks' Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Extreme Networks' to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 11%. As a result, revenue from three years ago have also fallen 2.0% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 9.9% each year as estimated by the seven analysts watching the company. That's shaping up to be similar to the 8.7% per annum growth forecast for the broader industry.

In light of this, it's understandable that Extreme Networks' P/S sits in line with the majority of other companies. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

The Bottom Line On Extreme Networks' P/S

Its shares have lifted substantially and now Extreme Networks' P/S is back within range of the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

A Extreme Networks' P/S seems about right to us given the knowledge that analysts are forecasting a revenue outlook that is similar to the Communications industry. At this stage investors feel the potential for an improvement or deterioration in revenue isn't great enough to push P/S in a higher or lower direction. Unless these conditions change, they will continue to support the share price at these levels.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Extreme Networks with six simple checks will allow you to discover any risks that could be an issue.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.