Arista Networks IPO Soars, Taking A Switch To Cisco

Investor's Business Daily

Arista Networks enjoyed a strong debut Friday as investors jumped to get a piece of a fast-growing, profitable company with disruptive technology taking on giant Cisco Systems.

The stock rose 28% to 55, climbing as high as 60 intraday. Arista Networks (ANET) late Thursday sold 5.25 million shares at 43, above the expected IPO range of 36 to 40. The company plans to use most of the $226 million in proceeds to expand market share in data-switching modules.

Arista's public offering was the latest bullish sign for technology initial public offerings, but it's also atypical. The bulk of company revenue comes from hardware sales. Most tech new issues this year rely on connecting with customers via the Internet. They include China's e-commerce giant JD.com (JD) and beauty products retailer Jumei (JMEI) as well as cloud-based customer-service software provider Zendesk (ZEN).

Taking On Cisco

But like most top-notch tech IPOs, Arista offers a disruptive technology that, in this case, threatens Cisco (CSCO). Arista makes network switching technology, which Cisco has dominated since its IPO 24 years ago.

Arista competes in the data-center market for ethernet switches that run at top-end speeds from 10 gigabits to 100 gigabits per second. This market will double in size from about $6 billion in 2013 to $12 billion in 2017, according to Crehan Research.

Cisco holds a market share above 70%, according to Arista's IPO prospectus. Arista is No. 2, with just 6% share, but analysts say it's well positioned.

"Arista Networks started with a clean sheet of paper and is clearly disrupting Cisco's incumbent market position in data-center switches," said Mark McKechnie, analyst at Evercore.

Arista's secret sauce is its software, which makes it easy for users of its ethernet switches to modify network features quickly, without ripping out the plumbing.

Arista revenue rose 87% to $361 million in 2013. Net income shot up to $42.5 million, up from $21.3 million. In Q1 2014, Arista reported that revenue rose 97% to $117.2 million, with net income of $12.3 million.

A Switch In Time

Businesses are rapidly moving to cloud computing. Amazon (AMZN), Google (GOOGL) and Microsoft (MSFT) helped pioneer large-scale cloud-data centers to meet the growing demands of customers. Such centers use thousands of servers connected by optical-fiber lines, routers and switches that distribute software apps and data across the Internet and wireless networks to smartphones, tablets, PCs and other systems.

Cloud networking is the fastest-growing segment of the data-center switching market.

"Arista found an opportunity to break into Cisco's front yard, but Cisco has them in their sights," McKechnie said. Cisco has introduced technology that, like Arista, makes the software the central element of data-center switches, a category called software-defined networking.

Cisco referred to Arista as a "niche player" at a big IT trade show two months ago, according to a report by International Strategy & Investment Group analyst Brian Marshall. He quoted Cisco Senior Vice President Soni Jiandani as saying that Arista will get squeezed at the low end by non-branded switch suppliers while Cisco outplays them at the high end.

Marshall has a buy rating on Arista with a price target of 60.

"Many companies are frustrated by having only one major supplier of switching equipment," Marshall wrote in reference to Cisco. A strong second to Cisco has yet to emerge.

"Arista will emerge over time to fill this role in data-center ethernet switching as its value proposition and customer awareness grows," Marshall wrote.

Many recent tech IPOs shot up Friday as the market rally spurred aggressive bets. Cheetah Mobile (CMCM) and Truecar (TRUE), both May debuts, shot up more than 20% to new highs. JD.com and Jumei also hit intraday bests .

View Comments (1)