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Finance

Which Small-Cap Networking Stock is a Better Investment?

With a $1.42 billion market capitalization, Extreme Networks, Inc. (EXTR) in San Jose, Calif., provides software-driven networking solutions for enterprise, data center, and service provider customers worldwide. In addition, it designs, develops, and manufactures wired and wireless network infrastructure equipment. In comparison,  San Mateo, Calif.’s Sonim Technologies, Inc. (SONM) provides ruggedized mobile phones and industrial-grade accessories for task workers. It has a market capitalization of $37.47 million.

The demand for networking solutions has soared over the past year as people spent most of the time indoors amid the COVID-19 pandemic and relied on smart gadgets for their work. The industry should keep growing with the accelerated pace of digitization and increasing adoption of network-based technologies. According to a report by Markets and Markets, the global network-as-a-service (NaaS) market is expected to grow at a 29.4% CAGR  from 2021 – 2026. Therefore, both EXTR and SONM should benefit.

SONM has gained 6.7% in price over the past month, while EXTR has delivered  negative returns. However, EXTR’s 92.7% gains over the past nine months are significantly higher than SONM’s negative returns. Moreover, EXTR is the clear winner with 147.8% price gains versus SONM’s negative returns in terms of the past year’s performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On August 10, 2021, EXTR announced its intention to acquire a newly created entity called Ipanematech SAS, which is the SD-WAN division of Infovista. The acquisition is expected to expand the company’s market-leading ExtremeCloud portfolio, offering new cloud-managed SD-WAN and security solutions required to power the Infinite Enterprise.

SONM announced a new partnership with 4K Solutions on July 20, 2021, to launch its next-generation MBK-Elite. John Graff, the company’s CMO, said, “Combining Sonim’s expertise in rugged smartphones with 4K Solutions expertise with mobile broadband kits is a win-win for customers needing a rapid deployment solution for emergency response.”

Recent Financial Results

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EXTR’s revenue surged 29% year-over-year to $278.10 million for the second quarter, ended June 30, 2021. Its non-GAAP operating income grew 233.8% year-over-year to $37.37 million, while its non-GAAP net income increased 635% year-over-year to $24.60 million. Its non-GAAP EPS was  $0.19, up 533% year-over-year.

SONM’s revenue decreased 43.2% year-over-year to $11.95 million for its  fiscal second quarter, ended June 30, 2021. Its gross profit fell 46% year-over-year to $2.65 million. However, its net loss decreased 5.8% year-over-year to $6.67 million. The company’s loss per share was $0.10, down 54.5% year-over-year.

Expected Financial Performance

Analysts expect EXTR’s revenue to increase 7.4% in its fiscal year 2022 and 5.6% in fiscal 2023. The company’s EPS is expected to grow 77.8% for the quarter ending September 30, 2021, and 31.6% in its fiscal year 2022. Furthermore,  its EPS is expected to grow at a 20% rate  per annum over the next five years.

SONM’s revenue is expected to decrease 5% in its fiscal year 2021 and increase 22% in fiscal 2022. Its EPS is expected to grow 30% for the quarter ending September 30, 2021, and 37.8% in fiscal 2022. In addition, its EPS is expected to grow at a 25% rate per annum over the next five years.

Profitability

EXTR’s $1.01 billion trailing-12-month revenue is significantly higher than SONM’s $54.42 million. EXTR is also more profitable, with a 58% gross profit margin compared to SONM’s 24.3%.

Also,  EXTR’s ROE, ROA, and ROTC of 6.47%, 2.45%, and 5.22%, respectively, compare with SONM’s negative returns.

Valuation

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In terms of forward EV/S ratio, EXTR is currently trading at 1.44x, versus SONM’s 0.56x.

POWR Ratings

EXTR has an overall A rating, which equates to a Strong Buy in our proprietary POWR Ratings system. In contrast,  SONM has an overall D rating, which translates to a Sell. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

EXTR has an A  grade  for Growth, consistent with analysts’ expectations that its revenue and EPS will increase significantly in the coming months. On the other hand, SONM has a Growth grade of C, consistent with analysts’ expectations that its EPS will increase in the near term, but its revenue will decrease.

EXTR has a B grade for Quality. This is justified given EXTR’s 69.31% trailing-12-month gross profit margin, which is 57.97% higher than the 49.04% industry average. SONM, in contrast,  has a Quality grade of D, which is in sync with its 24.34% trailing-12-month gross profit margin, which is lower than the 49.04% industry average. Of the 55 stocks in the B-rated Technology – Communication/Networking industry, EXTR is ranked #2. However, SONM is ranked #49.

Beyond what we’ve stated above, we have also rated the stocks for Value, Stability, Momentum, and Sentiment. Click here to view all the EXTR ratings. Also, get all the SONM ratings here.

The Winner

The networking solution market is expected to grow exponentially with increasing demand for advanced technologies to facilitate remote working. While both EXTR and SONM are expected to gain in the long run, it is better to bet on EXTR now because of its better financials and higher profitability.

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.


EXTR shares were trading at $10.90 per share on Wednesday afternoon, up $0.07 (+0.65%). Year-to-date, EXTR has gained 58.20%, versus a 21.96% rise in the benchmark S&P 500 index during the same period.

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About the Author: Nimesh Jaiswal

Nimesh Jaiswal’s fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More…

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