Is Arista Networks Stock Price A Buy?

Arista Networks Stock Price & News: Cloud computing has long since passed from a trendy tech buzzword to a well-established business best practice. According to RightScale’s 2019 “State of the Cloud” report, 94 percent of companies are now using the cloud in some form or fashion.

The primary advantage of the cloud is that businesses no longer need to assume responsibility for the software and IT infrastructure that they use on a day-to-day basis.

Rather, these obligations are taken care of by the cloud provider, which provisions the necessary resources to customers over the Internet. In so doing, companies can achieve a variety of benefits such as lower costs, smaller in-house IT departments, and convenience and flexibility.

Since cloud computing is in such high demand, it’s no surprise that providers of cloud technology have been on the rise lately. One cloud computing stock that’s been on many tech investors’ radar is Arista Networks [NYSE: ANET], a computer networking company that builds network switches for cloud data centers.

While shares of Arista are up by roughly 10 percent since the start of the year, this figure belies the bumpy ride that the stock has taken since January: growing by 50 percent throughout March and April before plunging precipitously in May. With this turbulence in mind, what’s in store for Arista investors?

What Does Arista Networks Do?

Arista Networks [NYSE: ANET] is a computer networking company that builds components and management tools for cloud computing environments. The company specializes in cloud network solutions for large data centers.

In particular, Arista has developed network switches for high-speed Gigabit Ethernet. Most recently, the company introduced the Arista 7060X4 Series, which supports speeds of 400 gigabits per second.

This lightning-fast pace enables cloud networks and data centers to do work on cutting-edge, high-volume applications such as artificial intelligence, machine learning, and serverless compute.

Headquartered in Santa Clara, California, Arista currently employs an estimated 2,300 people. The president and CEO of Arista is Jayshree Ullal, who has served in these positions since October 2008. The company’s main competitors include other providers of computer networking solutions such as Cisco, Juniper Networks, Huawei, and Extreme Networks.

In terms of M&A activity, Arista has recently completed two sizable acquisitions in Q3 2018: Metamako and Mojo Networks.

Metamako builds low-latency FPGA-enabled network switches, while Mojo Networks is the inventor of “cognitive WiFi,” which uses big data and analytics to automate the troubleshooting process for wireless networks.

Is Arista Networks a Buy?

Would-be investors in Arista are understandably attracted by the strong showing that the company’s stock has had thus far in 2019. But is there substance behind the hype for Arista?

Arista Networks [NYSE: ANET] has posted solid quarterly financial numbers so far this year. Year-over-year revenue grew by 26 percent in Q1 and by 17 percent in Q2.

The company’s market capitalization of $18.6 billion—roughly 25 times its last 12 months of earnings—means that the stock is priced for growth.

In particular, Arista is poised to profit from the boom of “edge computing,” a cloud computing trend in which data storage and computation occur more closely to the business network so as to improve response times and save on bandwidth costs.

Arista has developed lightning-fast network hardware that is used by big customers like Microsoft, which represents about one-sixth of Arista’s revenue.

What’s more, in June 2019 Arista announced the expansion of its “cognitive campus portfolio” for its customers with campus networks (computer networks composed of multiple local area networks within a limited geographical area).

What are the Risks of Buying Arista Networks?

Despite these promising signs for Arista, the stock also shows a couple of troubling warning signs that potential investors should take into account.

First, the first half of 2019 saw a slowdown in orders for Arista Networks [NYSE: ANET] from the company’s major customers after a busy H2 2018.

According to CEO Jayshree Ullal, “we saw less than the normal order strength in late March and the month of April… In particular, one cloud titan has placed most orders on hold for Q2 2019.”

Current predictions are that these biggest customers will see revenue growth in only single-digit percentages moving forward, which has put a damper on many investors’ enthusiasm for the stock.

The ongoing threat of a U.S.-China trade war has put a damper on global economic prospects for the short and medium term, including the technology industry.

However, the good news is that cloud computing will likely remain insulated from much of the trade war’s impact. Google Cloud CEO Thomas Kurian, for one, says that cloud computing is seeing “enormous growth around the world” and has “not been affected by the trade war.”

Arista Networks Stock Forecast: Summary

The dramatic increase in demand for cloud computing infrastructure means that Arista Networks [NYSE: ANET] is well-positioned to benefit. Even if Arista stock slows down or hits a downturn in the near future, the company’s long-term potential will likely remain bright.

However, the tech industry is infamously volatile and mercurial. A great deal of Arista’s success in the coming months and years will depend on whether the company can retain big customers and adapt to changing trends such as the growth of the campus data center.

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.