Arista Gets Back to Growth, Should You Buy?

Arista Networks NYSE: ANET reported its fourth-quarter earnings after the bell yesterday, and there wasn’t much to complain about. The networking software and hardware company’s sales increased 17.4% yoy and 7.1% sequentially to $648.5 million in Q4, beating Wall Street estimates of $628.9 million. Non-GAAP earnings were $2.49 a share, topping the consensus of $2.39.

Arista’s first-quarter guidance of $630-650 million in revenue came in above analyst estimates of $610 million. At the midpoint of Arista’s range, the company would grow revenues by 22.4% yoy, an acceleration over Q4.

That would mark Arista’s fourth consecutive quarter of improving revenue comps, but Arista’s revenue actually dropped in each of the first three quarters of 2020: down 12.2% in Q1, down 11.1% in Q2, and down 7.5% in Q3.

Wait, what? A networking software and hardware company experiencing revenue declines during the pandemic?

Arista is a B2B company that sells networking hardware and software solutions that companies need to build cloud data centers. Sounds like the perfect business for these times, eh? Not at the moment.

Some of Arista’s biggest customers, including Facebook NASDAQ: FB and Microsoft NASDAQ: MSFT, cut their infrastructure spending in 2020. Those two companies each accounted for more than 10% of Arista’s revenue in 2019, so the spending declines had a material effect.

In a perfect world you don’t want to see a company rely so heavily on two customers, but both of those companies are doing well, and they will likely increase their infrastructure spending in 2021 and beyond.

The Cloud Market is Expected to Grow Much More

According to ResearchAndMarkets.com, the global cloud computing market is expected to grow from $371.4 billion to $832.1 billion by 2025, which would work out to a CAGR of 17.5%.

The analysts, however, are only projecting 13.4% revenue growth in 2021 and 11.1% revenue growth in 2022 for Arista. Those numbers seem too conservative as Arista’s outstanding products should allow it to at least grow at the same rate as the industry.

The company’s products enable clients to interconnect and manage all of their network environments, cutting costs and saving time. An increase in devices and cloud centers will only further intensify the need for Arista’s solutions moving forward.

Arista is Trading at a Reasonable Multiple

With Arista, you won’t get the 50%+ accelerating revenue growth that you get with some high-flying growth stocks, but you also won’t get the big price tag. Arista is trading at 9.5x forward sales and 33.3x forward earnings.

If Arista grows its revenue and earnings at a CAGR of 15% over the next five years – which seems very doable – both would double. Shares would be trading at 4.75x forward sales and 16.65x forward earnings at current levels, and likely have additional growth upside from there. That type of extrapolation can be dangerous, but it just goes to show how Arista shares have a lot of room to run in a bull scenario.

How Should You Play Arista?

Arista shares are set to trade more than 5% higher at the open today, just shy of all-time highs set in April 2019. Since the beginning of 2020, Arista shares are up a shade under 60%, which feels like poor performance for a tech stock over that timeframe.

ANET shares were actually right around breakeven for 2020 before Arista reported its Q3 earnings; shares surged on the numbers and haven’t looked back.

It’s easy to feel like you’ve missed the boat on Arista, but the rally may still be in the early stages. A lot of investors lost faith in the company, but will likely come back around with the growth outlook improving.

Ideally, you wouldn’t want to buy shares just below all-time highs, but this isn’t a case where Arista has hit the $330 range several times and failed. Shares are unlikely to face much resistance if they reach April 2019 levels.

Arista is an excellent buy-and-hold candidate, and you might want to get in sooner rather than later.