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There are several facts regarding Extreme Networks (NASDAQ:EXTR) that make it a compelling investment with extreme upside potential. The company has perfectly positioned itself to take advantage of a booming market and is drawing significant attention from its competitors.

In addition, the company's financials are solid with zero debt and nearly half its market cap in cash and investments ($142 million as of end of 2Q2011), which have actually increased over the past four consecutive quarters. If the company does not receive a takeover bid in the near future, I would be very surprised. But, even if it does not, the company is about to go through a period of rapid, sustained earnings growth and will form strong barriers to entry.

The Company, Customers, and Partners

Extreme Networks addresses a wide range of customers with wired and wireless network infrastructures, from corporate enterprises such as manufacturers, retailers, financial institutions, utilities and healthcare organizations, to large universities and K-12 school districts to federal and local governments worldwide. The company serves 4 of the top 6 mobile Network Equipment Providers (NEPs). If you place a call on your mobile phone, surf the Internet, join a conference call or watch a video on demand, you are using NEPs technologies to get those services. NEPs are literally influencing the lives of billions of people around the world.

The key to Extreme's Current Strategy is to build vertical solutions that create strong barriers to entry. This strategy has been primarily enabled through strategic alliances and partnerships. The list includes 3M (NYSE:MMM), Adpatec (NYSE:ADPT), Citrix (NASDAQ:CTXS), Dell (NASDAQ:DELL), Intel (NASDAQ:INTC), Oracle (NYSE:ORCL), Symantec (NASDAQ:SYMC), F5 (NASDAQ:FFIV), Network Appliance (NASDAQ:NTAP), Microsoft (NASDAQ:MSFT), and QLogic (NASDAQ:QLGC).

Management

The company is under new leadership. The new CEO, Oscar Rodriguez, was formerly the Chief Marketing Officer of Alcatel-Lucent (NYSE:ALU), a key competitor in Extreme Networks' space. He has the experience, but most importantly, he is delivering well on turn around initiatives. The bottom line initiatives include cost reductions of $2 million per quarter and accelerating EPS. The top line that would have earned them $0.02 per share will now earn $0.05-$0.07 per the management's estimates in the latest earnings call. Expectations for the top line is an even better story and will be covered under "Disruptive Solutions" below.

Institutions and Insiders

Soros fund management has nearly doubled its stake since June of 2009 and holds approximately 10% of the company. The next three institutions, in order of holdings size, own another 19% of the company combined. Institutional holders comprise 62% while insiders retain 11%, so 73% is closely held.

Disruptive Solutions

Just a few weeks ago, Extreme Networks announced a family of mobile backhaul routers that will enable mobile operators to smoothly transition cell sites to 4G while maintaining existing 2G/3G investments. Per the press release :

"The company's E4G mobile backhaul family will provide the simplicity and scale of a next-generation, pure IP/Ethernet packet network to enable the cost-effective delivery of full motion video, voice and data to the one billion mobile broadband users expected by the end of 2011." Phil Bolt of Motorola stated, "Motorola Solutions looks to advance the capabilities of microwave backhaul with Extreme Networks next-generation mobile backhaul routers. The significant capacity and performance upgrades planned with its new mobile backhaul portfolio offer an opportunity for us to work with Extreme Networks to provide our customers with a flexible, resilient migration from circuit-based to IP networks." Michael Howard of Infonetics Research commented, "As the transition to 4G networks takes place, addressing cell site scalability, synchronization and Ethernet resiliency is critical. Mobile transport and wholesale operators are looking to build networks for the next decade and want future-proof Ethernet backhaul options. With existing deployments in mobile backhaul networks, Extreme Networks E4G product family has the features to address the requirements of additional mobile operators."

What does all this mean for Extreme? It's product is now the only real competitor to that of Cisco (NASDAQ:CSCO) to meet the requirement of the mobile 4G world. Others, such as Tellabs (NASDAQ:TLAB), Juniper (NYSE:JNPR) and HP (NYSE:HP) are now behind the curve. And the launch of Extreme's product line could not have come at a better time.

Only three days later, Feb 11, 2011, President Obama announced a plan to achieve his goal of giving 4G access to 98% of Americans! Obama’s plan has the following components:

  • Double wireless spectrum available for mobile broadband. The White House says it aims to free up the 500 Mhz band with enough financial
  • Incentives to get current licensees to cough up the spectrum.
  • A $3 billion fund to support wireless innovation and development.
  • Deploy a interoperable public safety wireless network.
  • A one-time $5 billion fund to build out 4G in rural areas.

That final part is probably the most noteworthy. The aim is to blanket the country in 4G. The 4G market is huge and Cisco has already indicated that they are losing market share.

This is a very exciting time for Extreme. In the next few weeks, I expect investors will see the stock price break out above its recent 52 week high of $4.25 a share reached on February 9th of this year (immediately after the new product line release).

The company trades at a price/sales ratio of 1 and slightly over 2 times cash and investments. I believe the stock price will easily double within the next 12 months, if the company is not taken over. Alternatively, a fair buyout offer would be north of $8 per share. Some readers might remember the article I wrote for Seeking Alpha telling investors to buy 3COM (COMS) as a buyout target and know that it was subsequently taken over. Extreme networks currently carries many of the same gem-like characteristics that 3COM did at that time.

As I did with 3COM, I continue to buy Extreme at these incredibly cheap prices and will continue to do so until the market wakes up to see this true gem.

Source: Extreme Networks: Extreme Upside Potential