Shares of Arista Networks, Inc. ANET are down 32.5% over the past year, making it the worst performer within the Zacks Communication - Components industry. The decline was primarily triggered by a sudden shift in the procurement strategy of a key cloud titan, resulting in a material reduction in demand.
What Ails Arista?
Arista is plagued by volatility in demand in its cloud business, which is significantly hindering its long-term prospects. Total revenues in fourth-quarter 2019 decreased 7.2% year over year to $552.5 million due to a truncated procurement order schedule from a key cloud titan. This followed a record plunge in cloud demand in the third quarter, resulting in significant share meltdown.
The company expects near-term volatility to continue in the cloud business despite underlying strength of the resilient business model and diligent execution of operational plans. For first-quarter 2020, the company projects revenues in the range of $522-$532 million. It anticipates non-GAAP gross margin of 63% and non-GAAP operating margin of approximately 34%. The company expects 2020 to be quite turbulent, with a pause in cloud titan set of orders leading to muted growth compared with previous years.
Earnings estimates for the current year have decreased 19.8% over the past year to $8.73 per share, while next-year earnings estimates are down 26% to $10.05. Redesigning of products and their supply chain mechanism have eroded margins of the company. Moreover, intensifying competition, legal woes and stretched valuation have been perennial concerns for the company.
Down But Not Out
Arista topped the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the beat being 10.3%, on average. It is a leader in 100-gigabit Ethernet switching share in port for the high-speed datacenter segment. The company has successfully integrated two M&A transactions — Mojo Networks for Cognitive Wi-Fi in the campus and Metamako for ultra-low latency networking — which remain additional tailwinds. Moreover, it is earning a strategic role with customers deploying transformative cloud networking.
Furthermore, Arista continues benefiting from the expanding cloud networking market, owing to strong demand for scalable infrastructure. In addition to high capacity and easy availability, its cloud networking solutions promise predictable performance along with programmability that enables integration with third-party applications for network management, automation and orchestration. The company’s product portfolio facilitates the implementation of high-performance, highly scalable and appropriate solutions for every environment.
Arista’s strategy of leveraging merchant silicon from multiple suppliers has expanded product portfolio and increased its ability to offer products at cheaper prices. This has also helped it to focus on developing software like EOS (Extensible Operating System) and CloudVision. While EOS is core to the company’s cloud networking solutions for next-generation data centers and cloud networks, CloudVision is a network-wide approach for workload orchestration, workflow automation and real-time telemetry as a turnkey solution for cloud networking. Arista is well poised to benefit from strong demand for its data center switches. Moreover, continued spending on IT infrastructure products (server, enterprise storage and Ethernet switches) for deployment in cloud environments is likely to benefit the company. Notably, its switches and routers support the high-end cloud networking market that require fast throughput at low cost.
What Does RSI Indicate?
RSI or ‘Relative Strength Index’ is a popular technical indicator. It compares average of gains in days that closed up to the average of losses in days that closed down. Readings above 70 suggest an asset is overvalued, while that below 30 indicates undervalued conditions.
Arista has an RSI reading of 27, which suggests it is now in the undervalued territory, making it a potential long-term investment candidate.
Arista currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the broader industry include Motorola Solutions, Inc. MSI, PCTEL, Inc. PCTI and Viasat Inc. VSAT, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Motorola has long-term earnings growth expectation of 8.5%. It delivered positive earnings surprise of 6.6%, on average, in the trailing four quarters, beating estimates on each occasion.
PCTEL surpassed earnings estimates on each occasion in the trailing four quarters, the positive surprise being 150.6%, on average.
Viasat delivered positive earnings surprise of 402%, on average, in the trailing four quarters, beating estimates on each occasion.
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