In this article, I evaluated two stocks, Motorola Solutions, Inc. (MSI) and Extreme Networks, Inc. (EXTR), to predict the communication equipment winner this year. After thoroughly evaluating these stocks, I think EXTR might be a superior choice for the reasons discussed in this article.
The Global communication networks market is expected to grow at a CAGR of 3.6% until 2028. The growth is expected to be driven by factors such as the increased adoption of wireless technologies and the need for faster data transmission in various industries, including transportation, oil and gas, mining, etc.
Furthermore, the global communication networks market is expected to witness an exponential growth in demand for wireless-based services such as voice, video, and cloud computing applications due to the increasing adoption of broadband connections across different geographic regions.
Companies are investing heavily in research and development, creating innovative products to remain competitive.
MSI declined 2.9% over the past month compared to EXTR’s 3.5% decline. The stock has gained 11.1% over the past nine months compared to EXTR’s 15.5% decline.
However, here are the reasons why I think EXTR might perform better in the near term:
Recent Developments
On December 18, 2023, MSI has acquired IPVideo, the creator of the HALO Smart Sensor, an all-in-one intelligent sensor that detects real-time health and safety threats. The company is based in Bay Shore, New York.
Conversely, On November 7, 2023, EXTR unveiled ExtremeCloud Universal Zero Trust Network Access (ZTNA). This subscription service integrates network, application, and device security, simplifying management and enhancing security across locations such as campuses and remote sites. Universal ZTNA ensures consistent security policies, cost efficiency, and streamlined user network access management.
Nabil Bukhari, Chief Technology Officer and Chief Product Officer at EXTR, foresees Universal ZTNA as a key cloud-based solution for securing the Infinite Enterprise. He stressed its simplicity, cost-effectiveness, and the capability to ensure secure access to any application from any device, anywhere.
Recent Financial Results
MSI’s Sales for the third quarter ended September 29, 2023, increased 8% year-over-year to $2.56 billion. Non-GAAP net income attributable to MSI for the same quarter increased 6.4% year-over-year to $547 million. In addition, its non-GAAP EPS came in at $3.19, representing an increase of 6% over the prior-year quarter. However, Selling, general and administrative expenses increased marginally year-over-year to $380 million.
On the contrary, EXTR’s total net revenues for the first quarter ended September 30, 2023, increased 18.6% year-over-year to $353.14 million. The company’s non-GAAP operating income increased 72.8% year-over-year to $62.49 million. Its non-GAAP net income increased 71.8% year-over-year to $46.54 million. Also, its non-GAAP net income per share came in at $0.35, representing an increase of 75% year-over-year.
Past And Expected Financial Performance
Over the past three years, MSI’s revenue increased at a 9.4% CAGR. Analysts expect MSI’s revenue to increase by 9.7% in the year ended December 2023 and 4.1% in the fourth quarter ended December 2023. Its EPS is expected to increase 13.1% in the year ended December 2023 and marginally over the fiscal fourth quarter (ended December 2023).
Conversely, EXTR’s revenue has increased at a CAGR of 13.8% over the past three years. Its revenue is expected to increase 1.6% in the fiscal year ending June 2024 Its EPS is expected to rise 14.1% in the year ending June 2024 and 10.2% in the fiscal fourth quarter ending June 2024.
Valuation
MSI’s forward EV/EBITDA multiple of 18.94 is higher than EXTR’s 13.07. MSI’s forward EV/Sales multiple of 5.82x is higher than EXTR’s 1.61x.
Thus, EXTR is more affordable.
Profitability
MSI’s trailing-12-month gross profit margin of 49.54% is lower than EXTR’s 58.55%. In addition, MSI’s trailing-12-month asset turnover ratio of 0.82x is lower than EXTR’s 1.26x.
Thus, EXTR is more profitable.
POWR Ratings
MSI has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, EXTR has an overall rating of B, translating to Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. MSI has a D grade in Value. Its forward EV/Sales of 5.82x is 102% higher than the industry average of 2.88x. Its forward EV/EBIT multiple of 20.92 is 3.4% higher than the industry average of 20.22x.
On the other hand, EXTR has a B grade in Value. Its forward EV/Sales of 1.61x is 44% lower than the industry average of 2.88x. Its forward EV/EBIT multiple of 9.57x is 52.7% lower than the industry average of 20.22x.
Moreover, MSI's C grade for Growth is in sync with its mixed performance in the recent quarter. On the other hand, EXTR's B grade for Growth is in sync with robust performance.
Among the 46 stocks in the in the Technology - Communication/Networking industry, MSI is ranked #14, while EXTR is ranked #4.
Beyond what we’ve stated above, we have also rated both stocks for Stability, Momentum, Quality, and Sentiment. Get all MSI ratings here. Click here to view EXTR ratings.
The Winner
Amid favorable industry trends, players such as MSI and EXTR should benefit from these industry tailwinds.
EXTR’s higher profitability and lower valuation multiples makes it the better buy here.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Technology - Communication/Networking industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
EXTR shares were trading at $16.13 per share on Thursday afternoon, down $0.29 (-1.77%). Year-to-date, EXTR has declined -8.56%, versus a -0.44% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
Motorola Solutions (MSI) vs. Extreme Networks (EXTR) – Predicting the Communication Equipment Winner in 2024 StockNews.com
