Arista Networks vs Sierra Wireless Stock

Arista Networks vs Sierra Wireless Stock: The Internet of Things (IoT) has given rise to many new industries, and cloud computing services are chief amongst them.

Gartner estimates that the cloud computing industry will grow at approximately 18% through the year 2020, eventually reaching a value of $160 billion.

Investing in cloud computing companies is one way to take advantage of the trend. However, there are some important pros and cons to consider.

Pros and Cons of Investing in Enterprise Software Companies

One of the things that distinguishes these cloud computing companies from others in most software and hardware companies is that their revenue models are recurrent. They get a smaller amount upfront from their customers as opposed to selling a piece of software for a bulk sum. In exchange, these companies get predictable cash flow. This consistency lets the company plan for growth, scale up, and dependably afford its overhead.

Enterprise software also comes with the advantage that switching providers can be prohibitively expensive for customers. The monetary cost is minimal, but it takes time to switch systems over ad get everyone trained. It is so disruptive that most client companies don’t bother unless there some definitive reason, like a security breach.

Further, enterprise software companies have a captive audience to sell new products and add-ons as they are developed.

Drawbacks of Enterprise Software

That said, there are some important risk factors.

For one, many of these companies caught a tide and exploded, but that doesn’t mean that they were able to effectively scale up their systems.

In order to keep growing and thriving, companies in this space are under a ton of pressure to manage any growth and expand their capabilities.

Further, just because switching providers is difficult for customers, it doesn’t mean that they won’t move to a new company if the offering is considerably better. This puts enterprise software and cloud computing companies in a situation where they need to grow, and they need to improve their offerings at the same time.

That’s a tall order for any company, but especially ones as young as these. Many just haven’t been around long enough to manage from experience. Moreover, if these companies try to launch something and it fails, they have to absorb those costs.

Finally, enterprise software companies are quickly reaching a point where astronomical growth is less likely. The market is not quite saturated, but it is cluttered enough that cloud computing companies will not be able to attract as many new customers in a year as they once did.

Is Arista Networks Stock a Buy?

Arista Networks [NYSE: ANET] is a good example of this. This company is involved in software-based cloud networking. It also produces the switches that enable the technology and a platform called Extensible Operating System(EOS) that enables its systems to work together.

Together, these products create high-capacity cloud networks can meet the demands of companies and people that modern technology requires – often in a way that works better and costs less than traditional legacy networks.

According to its annual report, the company “experienced annual revenue growth rates of 30.7%, 45.8%, and 34.8% in 2018, 2017, and 2016, respectively.”

Going forward, Arista expects its revenue growth rates to continue to decline because it is achieving higher market penetration. The company recognizes this but if it produces numbers that are below what analysts expect, the stock is going to take a hit.

Arista Networks [NYSE: ANET] also faces a challenge because a large proportion of its income comes from a small number of customers. If it lost one, the company could be in trouble.

In FY 2018, 27% of Arista’s business came from sales to Microsoft – up from 16% in FY 2017 and FY 2016. The percentage was higher in 2018 for a variety of different reasons that Arista Networks [NYSE: ANET] does not plan to repeat in 2019 and going forward, but it is still an important risk.

This issue is compounded by the fact that these big customers often demand more favorable terms so the profit margin for the services they receive are smaller than that of other customers.

Arista is already facing intense competition from much larger companies and many of those firms are big enough (and well-established enough) that they could potentially offer lower prices. Arista Networks [NYSE: ANET] can surmount these issues as long as it stays innovative and secure, but the stakes are high.

One false move, one feature that competitors offer that Arista Networks [NYSE: ANET] doesn’t, one pricing decrease by its rivals that Arista can’t match, and it could be in trouble.

Should You Invest in Sierra Wireless Stock?

Sierra Wireless [NASDAQ: SWIR] is also in bed with Microsoft. In June 2019, the company announced a strategic collaboration that it is calling the “first full-stack IoT solution.”

“The combination of Sierra Wireless’ full suite of IoT solutions and Azure IoT Central addresses a critical gap in the marketplace,” explains Sierra Wireless [NASDAQ: SWIR] CMO and SVP René Link. “We’ve consistently heard from customers about how complex it is to integrate IoT technology, which takes time and focus away from their core business. This collaboration creates a category-of-one IoT solution that will accelerate edge data into the cloud, allowing enterprises across the globe to monetize IoT.”

Sierra Wireless [NASDAQ: SWIR] operates in three segments: Enterprise Solutions, IoT Services (formerly called Cloud and Connectivity), and OEM Solutions.

On the OEM side, Sierra makes it easy for manufacturers to include or embed wireless connectivity in their products.

The company’s enterprise solutions include the popular AirLink routers while its IoT services include cloud and cellular services.

Applications for its offerings are very diverse. Intellinium uses its IoT services to enable a smart shoe that helps improve worker safety while the International Vending Alliance uses Sierra’s IoT platform to improve vending service delivery.

The company has strong growth prospects, especially as the IoT expands and demands for the next-gen solutions the technology enables increases. The collaboration with Microsoft is also encouraging, but nothing is guaranteed.