Tuesday, January 24, 2006

It's cheap for a reason

EXTR has been one of the cheapest networking stocks for a while, trading below 1x EV/Sales for some time. Trading in a range between $4 and $5ish for almost a year. EXTR has seen nice improvements in revenues for last few quarters, improving gross margins, better operating margin and even some buy-backs but the stock gets little respect. Today EXTR reported revenues that missed its own guidance. EXTR has been struggling to attain revenues above the $100M/qtr mark- same issue that bogged its competitor FDRY for sometime.

EXTR had serious issues in the US with its sale force, which resulted in a steep 29% sequential decline in US sales. Now that is more than a hiccup, that is a disaster. EXTR had similar issues in Japan last year. Asia-Pacfic region helped EXTR this quarter but going into seasonally slow quarter in APAC and with US still in doldrums makes me suspect of guidance for next quarter also. The inability of management to concurrently manage its business in all geographies is what makes EXTR "cheap". The management has serious issues that need to be dealt with 1) product roadmaps/differentiation, 2) sales leadership, 3) size/scale to expand into new customer set 4) growing competitive threat from both high-end and low-end competitors.

There are always reasons for a stock to be "cheap" or "expensive" on both relative and absolute basis and honing in on these reasons is what differentiate an average stock picker from an excellent one. Also, important to note is when the reason for a stock being cheap or expensive ceases to exist.

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