Arista Networks Rallies To New Highs Ahead Of Earnings

Arista Networks (NYSE: ANET) is notching a technical performance better than most stocks in the broader market. 

Shares of the cloud networking specialist cleared a flat base on October 13, surpassing a $384 buy point in lighter-than-normal volume. 

While it's ideal to see a stock clear a buy point in heavy volume, a breakout can also work if volume picks up in subsequent sessions. On October 14, the stock added another 2.95% in turnover 18% higher than average. 

The upward trend line for Arista began on October 1, as the stock rebounded 1.99% after dropping to a structure low of $340.72 earlier in the session.

Santa Clara, California-based Arista is still a fairly new public company, having IPO'd in July 2014. It's still well within the window where many growth stocks notch big price gains.

Arista Networks provides data-driven, client-to-cloud networking for large data centers, campuses and routing environments. The company delivers automation, analytics, security and other services.

The stock rallied to a new high of $396.51 on October 15. Shares closed Thursday at $395.39, up $0.68 or 0.17%. 

Always Check The Base Count When Evaluating A Stock 

While there are many positive signs technically, there's one potential caveat: Arista's most recent consolidation is classified as a third-stage base. That's because the stock has been rising for almost a year without re-setting the base count by undercutting a prior structure low.

A third-stage base means a run-up may be getting long in the tooth. In other words, institutional investors may be near the end of their buying spree and may be ready to take some profits. That doesn't mean the stock is destined to crater; it just means the big money may be nearing a time to take a breather.

That's never unusual after a lengthy run-up. Arista is up 35.84% year-to-date and 77.81% in the past year. You occasionally see selling in a stock around the one-year mark of a rally. That's because some investors wait until they can claim long-term capital gains, rather than short-term.

Despite the stock's strong technical performance and its longer-term promise, there's another reason to hold off on a buy right now: Arista Networks reports its third-quarter on November 1 after the market's close.

Analysts expect earnings of $2.30 per share on revenue of $737.32 million. That would be a decrease on the bottom line, and an increase on the top line.

The company has a long history of beating earnings and revenue views.

Over the past three years, Arista Networks has posted some impressive growth rates:

Revenue 12.08%

Operating Income 14.16%

Net Income 14.46%

Diluted EPS 14.30%

Return on Assets 15.27%

Return on Equity 21.64%

Return on Invested Capital 20.93%

Net Margin 27.72%

Arista is a large-cap, with a market capitalization of $30.34 billion. It's been an S&P 500 component since August 2018. Because of their size index inclusion, S&P 500 companies are followed by numerous stock analysts. That can be a good thing, as institutional investors have plenty of in-depth information and analysis about these stocks.

According to MarketBeat data, the consensus rating for Arista is a "buy," based on 20 analysts. The price target is $381.33, representing a 3.59% downside. That would be just below the stock's closing price on October 13, not exactly a devasting pullback.

Analysts expect full-year earnings of $10.72 per share, a year-over-year increase of 19%. Next year, that's seen rising another 12% to $11.97 per share. The estimate for 2022 was revised lower recently.

So is this stock a buy right now?

I like the potential for Arista, and the fact that the recent rally reflects confidence from institutional buyers. However, buying ahead of an earnings report is incredibly risky, as any small item buried deep into an earnings release may spark a selloff. Even if it's temporary and short-lived, it could shake you out just ahead of the next run-up.