Revenues Not Telling The Story For Extreme Networks, Inc. (NASDAQ:EXTR) After Shares Rise 27%

Despite an already strong run, Extreme Networks, Inc. (NASDAQ:EXTR) shares have been powering on, with a gain of 27% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 58% in the last year.

After such a large jump in price, when almost half of the companies in the United States' Communications industry have price-to-sales ratios (or "P/S") below 2x, you may consider Extreme Networks as a stock probably not worth researching with its 2.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

View our latest analysis for Extreme Networks

What Does Extreme Networks' P/S Mean For Shareholders?

Extreme Networks could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Extreme Networks will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Extreme Networks?

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

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Likewise, not much has changed from three years ago as revenue have been stuck during that whole time. So it seems apparent to us that the company has struggled to grow revenue meaningfully over that time.

Turning to the outlook, the next three years should generate growth of 5.8% per annum as estimated by the seven analysts watching the company. With the industry predicted to deliver 11% growth per year, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Extreme Networks' P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Extreme Networks' P/S Mean For Investors?

The large bounce in Extreme Networks' shares has lifted the company's P/S handsomely. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

It comes as a surprise to see Extreme Networks trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. At these price levels, investors should remain cautious, particularly if things don't improve.

It is also worth noting that we have found 1 warning sign for Extreme Networks that you need to take into consideration.

If you're unsure about the strength of Extreme Networks' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.