Entering text into the input field will update the search result below

Arista: With Growth Slowing Down, Risk/Reward Is Balanced

May 06, 2020 9:14 AM ETArista Networks, Inc. (ANET)
Gary Alexander profile picture
Gary Alexander


  • Shares of Arista dipped after reporting Q1 results, primarily on the company's announcement that revenue deceleration would steepen into Q2.
  • Following a -12% y/y contraction in Q1 revenues, Arista is calling for revenue to slip as low as -15% y/y in Q2, with operating margins to decline sequentially as well.
  • Arista is also no longer producing substantial margin/earnings growth, making its ~25x P/E ratio look quite rich.
  • Downgrading to neutral based on Arista's slowing prospects and limited demand visibility in 2020.

The past year hasn't been easy for Arista Networks (NYSE:ANET). As a relatively new entrant in the networking hardware space, Arista was previously able to enjoy huge revenue and earnings growth rates as the company continued to steal market share away from incumbent leader Cisco (CSCO), but now as Arista scales into a company with ~$2 billion in annual run-rate revenues, that explosive growth has pacified somewhat. Add in the uncertainties of the coronavirus, which has led many companies to delay their capex and IT spending plans, and Arista's stock is left looking for direction.

It's important to note, however, that Arista's shares have outperformed the broader market in 2020 - perhaps reflecting investors' optimism that greater usage of the internet and cloud services during the remote-work trend may drive some increase in hardware spend from large cloud titans (while Arista has confirmed this hypothesis is true, there are negative offsets). Whereas major equity indices are still down in the low-teens year-to-date, Arista shares have actually risen in the single digits. That trend of outperformance may slip, however, as following the release of Arista's first-quarter earnings, shares of Arista declined modestly:

Data by YCharts

I was pro-Arista in 2019 and even early this year as the company's valuation multiple - trading consistently in the mid-20s - was below its historical multiples and seemingly undervalued a company that was previously able to produce >40% EPS growth. As I've seen Arista's growth rates taper off and come under pressure during the coronavirus, however, I no longer believe Arista is a deep bargain stock.

At present levels, and considering Arista's rather dour expectations on its performance this year, Arista's risk/reward profile is balanced. While Arista's rich profit margins and ample cash balances keep me from being overly bearish on Arista (because investors will continue to see Arista

This article was written by

Gary Alexander profile picture
With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.