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Shares of Arista Networks, Inc. ANET have returned 84% in the past year, substantially outperforming the 8.7% rally of the industry. This outperformance can be attributed to company’s robust product portfolio as well as frequent customer wins.
However, Arista was recently downgraded by Cleveland Research citing concerns that companies operating large scale data centers might “shift” to other white-box switch providers or design its own.
Shares plunged 9.2% to close at $244.20, on Apr 13, following the report.
Customer Concentration: Significant Headwind
Customer concentration related to Microsoft MSFT is a significant concern for Arista. The software giant accounted for 16% of the company’s total revenues in 2017. Per CNBC, Arista expects Microsoft to attribute for 10% of revenues in 2018.
Moreover, intensifying competition in the routing space from Juniper JNPR remains a headwind. Further, subdued guidance for first quarter of fiscal 2018 along with costs associated with the ongoing lawsuit with Cisco over patents remain headwinds for the company.
Nevertheless, we believe robust portfolio and customer wins will help the stock rebound in the near term.
Solid Growth Opportunities
Arista’s switches and routers support the high-end cloud networking market that require fast throughput at low cost. The company recently launched time saving and cost efficient 7050X3 and 7260X3 platforms to enhance routing & switching for futuristic data centers.
We believe Arista is well poised to benefit from strong demand for its data center switches and routers. Per Transparency Market Research (“TMR”), the data center networking market is likely to grow at a CAGR of 15.5% between 2017 and 2025.
Additionally, Arista has emerged a strong challenger to Cisco’s CSCO dominant position within a short span of time driven by its robust portfolio of switches and routers, ably supported by EOS solution.
Positive Estimate Revisions
Moreover, Arista displays an impressive earnings surprise history. The company outpaced the Zacks Consensus Estimate in the trailing four quarters, recording a positive average earnings surprise of 25.3%.
Further, estimates for the company’s current quarter and current year earnings have moved higher over the past three months, depicting analysts’ optimism over its earnings growth.
The Zacks Consensus Estimate for its full-year 2018 earnings has increased 11.3% to $6.87 per share. The figure represents a year-over-year growth of 22.5%. For the next quarterly report, the company’s earnings have increased 13.4% to $1.52 over the same time frame. The figure reflects 63.4% year-over-year growth.
The earnings growth is expected to come on the back of solid sales. The consensus sales expectations for the first quarter and full year 2018 are $462 million and $2.08 billion, representing year-over-year growth of 37.7% and 26.3%, respectively.
Arista carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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