Issue #62: An AI “pick and shovel” business

Report date : 28-Mar-2023

Price at the time : $163

Price as of 05-Nov-2024 : $405.12, Return : +148.5%

Summary

Arista Networks designs and sells multilayer network switches to deliver software-defined networking (SDN) solutions for large datacenter, cloud computing, high-performance computing and high-frequency trading environments.


Arista Networks Inc. ($ANET)

Source: TradingView

Summary:

Share price at the time of writing: $163.00

  • Arista Networks specializes in software-driven cloud networking solutions for large data center, campus, and service provider environments.
  • $ANET’s products cater to a variety of customers, including high-performance computing, financial services, content delivery, and cloud service providers.
  • Revenues and earnings have been consistently growing over the past few years, and the valuation remains reasonable considering the company’s strong position in the networking solutions market.

What they do:

Arista Networks Inc. offers a wide range of high-performance data center switches and routers, network operating systems, network management software, and software-defined networking (SDN) controllers.

These products are available in various models and configurations, enabling customers to choose flexible solutions tailored to their specific needs.

$ANET’s key product offerings include:

  • Arista Extensible Operating System (EOS), a network operating system that provides a single binary image across all platforms
  • CloudVision, a network-wide approach to workload orchestration and workflow automation
  • Universal Cloud Network (UCN), a suite of software-driven networking solutions designed for cloud environments
  • Arista Networks employs a significant number of people in R&D to ensure that they remain at the forefront of innovation in the networking solutions space.

$ANET also offers comprehensive support and services to its customers, ensuring that they can fully utilize the capabilities of Arista’s products.

What we learned from social media and institutional investment patterns:

$ANET is a leading player in the cloud networking space, which generally garners some attention on social media. However, its focus on enterprise customers and lack of presence in the consumer market may limit its overall exposure.

Engagement on r/wallstreetbets is relatively low.

There are occasional mentions on r/stocks and other discussion groups, but posts are infrequent. Engagement has been generally moderate even during periods of significant stock price movement. A viral surge seems unlikely.

Insiders hold around 24.8% of the shares, a significant figure. Institutions hold 62.9% of the float, which is relatively large at 72.2 million shares. 724 institutions hold shares, with Blackrock and Vanguard each holding just over 8% of the float.

Institutional investors seem generally positive on the stock.

Source: quiverquant.com

The large float and high level of institutional ownership mean that the stock is less likely to experience significant price swings due to retail investor activity.

Why $ANET could be valuable:

Arista Networks operates in high-growth markets, with the global data center networking market expected to grow at a CAGR of 11% through 2028. As more businesses move their operations to the cloud and require more efficient networking solutions, $ANET stands to benefit significantly.

$ANET provides some of the most innovative and efficient networking solutions available, catering to a diverse range of customers in industries where technology plays a crucial role in maintaining a competitive edge.

Arista Networks has a strong track record of innovation, with a consistent focus on R&D to ensure they remain at the forefront of the networking solutions market. This commitment to innovation has allowed them to develop a strong product portfolio that addresses the evolving needs of their customers.

$ANET revenues have been steadily growing over the past few years.

Source: Simply Wall Street

Arista Networks’ customers are primarily large enterprises and service providers who require high-performance networking solutions. Their decision to purchase $ANET products is based on the performance and quality of the products, rather than advertising or celebrity endorsements.

Revenue growth in the most recent quarter was 27.5% compared to the same quarter last year. This is faster than the overall market growth, indicating that the company is gaining market share.

Operating margin is a healthy 32.7%. While return on equity stands at 30.2%. The Company has a solid balance sheet with more cash than debt.

$ANET’s consistent revenue and earnings growth have allowed the company to maintain reasonable valuation ratios, despite a considerable increase in the stock’s value over the last few years. The Company trades at 1.42 x trailing twelve-month sales and 32.6 x trailing earnings. The price/earnings growth (PEG) ratio is 1.87.

These valuations are moderate for a high-growth tech company, which may reflect investor confidence in the company’s ability to continue delivering strong financial performance.

⚠️ What the risks are:

1️⃣ Competitive landscape. $ANET operates in a highly competitive market, with several well-established players such as Cisco, Juniper Networks, and Extreme Networks. The company needs to continuously innovate and deliver superior products to maintain its market position.

2️⃣ Dependence on a limited number of customers. Arista Networks derives a significant portion of its revenues from a limited number of large customers. Any loss of such customers or a decline in their spending could adversely impact the company’s financial performance.

3️⃣ Supply chain disruptions. Like most tech companies, $ANET relies on a global supply chain to source components and manufacture its products. Geopolitical tensions, natural disasters, or other factors could disrupt this supply chain and negatively impact the company’s operations.

Bottom line:

$ANET is a solid growth play in the networking solutions market, with a strong product portfolio, consistent revenue and earnings growth, and a reasonable valuation. Investors should be mindful of the risks associated with competition, customer concentration, and supply chain disruptions.

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