Top Picks 2019: Arista Networks Inc. (ANET)

01/15/2019 5:00 am EST

Focus: TECHNOLOGY

James Kelleher

Director of Research & Senior Analyst: Technology, Argus Research Corporation

Arista Networks (ANET) is bringing networking into the age of the cloud. Cloud networking brings efficiency and scale benefits to legacy networking environments, explains Argus Research analyst Jim Kelleher.

Arista’s CloudVision campus for unified wireless & wired leverages its acquisition of Mojo Networks. In our view, Arista has a huge untapped potential with telcos, ISPs, and cloud titans.

In August, Cisco and Arista ended their patent infringement battle. Arista paid Cisco $400 million in cash, ending a cash drain and the uncertainty of litigation.

Revenue and EPS are growing faster than the company's share price. In 3Q18, revenue rose 28% from the prior year and non-GAAP EPS rose 31%. Management’s 4Q18 guidance calls for roughly 30% revenue and EPS growth. Its full-year forecast calls for EPS growth of 39%.

Valuations are attractive. The stock has retraced with the Technology sector and the overall market, even as analysts continue to raise their EPS estimates.

The shares are trading at a two-year forward relative P/E of 1.65, close to the five-year average of 1.60; the PEG ratio of 1.47 is below the average of 2.0 for peers. Year-end weakness in the stock has provided an attractive entry point. Our 12-month target price is $320.

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