Arista: A Pullback Opportunity?

11/30/2018 5:00 am EST

Focus: TECHNOLOGY

Rob DeFrancesco

Founder, Tech-Stock Prospector

During the recent market weakness, shares of Arista Networks (ANET) have been knocked down. We continue to like the company’s long-term growth potential, as the firm remains a market-share gainer in data center switches, notes Rob DeFrancesco, editor of Tech-Stock Prospector.

The strong results from the September quarter indicate Arista’s business continues to chug along at a healthy pace, as revenue growth of 29% even managed to accelerate from Q2’s 28% rate. Gross margin remained steady at 64.6% year over year.

Demand remains healthy for 100G switching products, a segment of the market where Arista has really shined. There’s nothing to indicate that Arista in 2019 will have any trouble continuing to build market share in high-speed datacenter switching.

Looking ahead, Arista is already positioning itself to be at the forefront when the 400G upgrade cycle really kicks in (expected to start in late 2019).

We are maintaining our 2019 EPS estimate of $8.90, but trimming the forward valuation to 34 from 36 to better reflect a somewhat reduced risk environment, resulting in a revised fair-value price target of $303, down from $320 previously.

Nothing has changed with respect to Arista’s fundamentals to warrant such a harsh sell-off; the result is an improved risk/reward set-up.

For long-term investors, we view any sharp pullback in Arista stock as an accumulation opportunity. For example, the 32% downdraft from the all-time high of $313.37 reached in late August to the October 29 low of $213.11 is the type of sharp volatility event that investors can use to their advantage when building a position.

Going into 2019, Arista looks well positioned to maintain its positive business momentum, particularly in the cloud and enterprise verticals. The company is also embarking on a multi-year initiative to become a significant presence in the campus-networking segment.

One caution on Arista: There’s ongoing concern about a potential slowdown in spending next year across the major U.S. cloud service providers. For now, that threat looks contained.

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