Arista Networks (ANET) is a leading supplier of cloud networking solutions for internet companies, cloud service providers, and next-generation data centers, explains analyst Jim Kelleher of Argus Research, a leading independent Wall Street research firm.
The company generates the largest portion of its revenue from switching products that incorporate its Extensible Operating System (EOS) software.
Arista is helping customers migrate from legacy architectures to cloud networks. During 2Q21, Arista surpassed 50 million cloud networking products shipped cumulatively. Arista’s technology has proven disruptive in the marketplace for large enterprise and cloud service provider solutions.
That market stalled early in the pandemic as branch offices sat idle and companies held off on new investments. As workers partly return to offices, the campus is now evolving to a distributed workplace environment. Arista has expanded its cognitive campus portfolio with new platforms, including the 750 series modular chassis and the 720 series fixed port switch.
ANET shares trade at 34.2-times our 2021 non-GAAP EPS estimate and at 30.9-times our 2022 forecast. The average two-year forward P/E of 32.5 is now above the five-year historical P/E (2016-2020) of 27.3. On a two-year-forward basis, ANET trades at a relative P/E of 1.46, below its historical relative P/E of 1.50. Historical comparables indicate a value in the low $300s, in a rising trend.
Compared to a diverse peer group that includes equipment vendors as well as cloud service providers, ANET trades at premiums that we believe are well deserved given its disruptive business model.
After mostly negative top- and bottom-line annual comparisons in 2020, Arista has shown first-half strength and appears positioned for sustained annual revenue and EPS growth in 2021 and beyond. The company is financially strong; debt is less than 5% of cash, which is growing rapidly.
Despite the recent share price recovery, ANET lagged peers in 2019 and 2020. We regard ANET share price weakness as an opportunity to establish or add to positions in what we regard as a premier long-term holding in the cloud networking space.
