Written by Ophir Gottlieb
While the market has become toppy, which we discuss in our Pro dossier Is the Market Going to Crash?, Arista’s rise has been more than just a momentum move.
Here is a glance at the company’s revenue (TTM) and net income (TTM) trends, through time:
Arista Networks Inc is making progress at a pace that even we did not see coming so quickly, and a recent bit of news that was under reported has pushed our bullish thesis yet further.
Arista Networks Inc is forever linked to Cisco Systems Inc (CSCO) — the two are head to head in many categories and they also have a contentious lawsuit that is still within the realm of the Federal Trade Commission (FTC).
Here is a quick snapshot of Arista Networks Inc’s progress against Cisco Systems Inc in the high-speed data center switching market:
On March 7th, 2017, Arista announced “Containerized EOS (containerized Extensible Operating System) to support alternate models of procuring, packaging and deploying Arista’s EOS® across cloud, enterprises and service providers.
First, here’s a snippet from that press release, and we’ll follow that up with actual English:
Arista cEOS™ introduces the containerized packaging of EOS software and its agents for deployment in cloud infrastructure with the same proven EOS software image that runs on all Arista products.
These flexible deployment options empower cloud network operators that are customizing their operating environments to provide a uniform workflow for development, testing and deployment of differentiated services.
It enables the provisioning of a robust and proven network operating system across production and development platforms with a uniform EOS distribution and single-image consistency.
Now for the translation…
WHAT THIS MEANS AND WHY IT MATTERS
These “containers” make up a part of virtual machines, which in this part of the tech world has been a buzz word for several years. The containers partition applications when they run on servers in a nimbler fashion than traditional virtual machine software (Alex Henderson of & Co, via Tiernan Ray on BARRON’S).
In the press release Arista Networks Inc (ANET) announced that its networking switch equipment, which it refers to as EOS in the press release, now runs in a container on a broad range of hardware and cloud operating platforms (our emphasis added). The company even wrote “(NEW)” next to this bullet point in the release to highlight it.
But, Arista Networks Inc (and Cisco Systems Inc (CSCO)) do function in a world that is way over the head of most analysts in technology, so we turn to Alex Henderson for some commentary with our emphasis added:
[The Street] generally didn’t know what to make of the technology. We think it’s a big deal.
This really matters to the Web 2.0 customers. The ability to include Arista technology in the DevOps process is likely to make Arista the de-facto standard in the industry and result in accelerating share gains.
Source: BARRON’S written by Tiernan Ray.
Henderson went on to address the elephant in the room rather bluntly when he said “Cisco can’t match it“. We are very careful when we recommend outside sources for information which are critical but often times overrun with click bait, but Tiernan Ray is a must follow on Twitter or in the news. He is exceptional.
Needham’s Henderson finished his analysis with this bit, after his rather transparent opinion about Arista’s strong position over Cisco with our emphasis added, again.
Arista Networks Inc is the only switch vendor that has a single binary code operating system across its entire product line.
Cisco cannot, in our opinion and that of Arista, create a singular image of its operating code independent of the hardware to put into the container and therefore is excluded from the DevOp process and therefore is less automated.
This is critically important to the Scaled Out players. The DevOp process is core to that cost containment program.
OK, now let’s take a step back from this news to the larger picture.
Arista Networks Inc is quickly becoming a leader in the guts of the cloud — that is, the network switches and routers that drive the progress forward. When we did our own research on the complexity and amount of data that is coming online in the next few years, what we found was staggering. Here is a snippet from our Top Pick dossier on the cloud and Arista Networks Inc:
In 2012 the Library of Congress estimated that all printed, audio, and video material came in at 3 to 20 petabytes. That means that one exabyte could hold a hundred thousand times the printed, audio and video material, or 500 to 3000 times all content of the Library of Congress.
By 2021, global traffic alone will generate 49 exabytes… per month.
The cloud is, generally speaking, just a cluster of computers and hardware sharing resources to power the Internet, apps, video, IoT and anything else that is connected and has data. But the requirements of the cloud from the end users are going to leap in complexity.
First, here is a chart of the worldwide public cloud market:
The complex functionality that will be required from the cloud has made room for Arista Networks Inc to challenge the incumbent Cisco Systems Inc (CSCO). It has also given rise to an opportunity for Alphabet Inc (GOOGL) within the cloud realm.
We recently penned our dossier Google’s Upside Is Absolutely Enormous and Unaccounted For. In that dossier we take time to focus on the four key drivers for Alphabet Inc (GOOGL), but one of them falls in line with Arista:
There is too much data and too many connected devices even today, not to speak of the absurdity that is to come, to not have a machine learning driven technology to balance the needs of every website, every app, all the data in complete harmony.
Google has an advantage over both of the incumbents — there simply is no company that has made more progress in the world of end-to-end machine learning and artificial intelligence than Google.
We’ll leave the details of that analysis to that dossier, but suffice it to say that the cloud and the growing complexity of requirements needed from those that own the data are a huge tailwind to this theme — one of the themes we feel most bullish about.
Arista is at an all-time high — and it deserves it.
There is still an ongoing FTC court case between Arista Networks Inc (ANET) and Cisco Systems Inc (CSCO) and it’s quite contentious. We discuss it at length in the Top Pick dossier, but for now let’s just note that when a ruling comes (again) there is some gap risk here in the stock.
For a long-term stock investors this can be nothing more than a blip, but for you option traders, please be aware of the risk in being short puts or selling covered calls against Arista — a day of reckoning is coming and the stock could gap.
WHY THIS MATTERS
If this is the kind of research that sparks your interest, then what we offer may be up your alley: Our research sits side-by-side with Goldman Sachs, Morgan Stanley, Barclays, JP Morgan, and the rest on professional terminals as a part of the famed Thomson First Call group.
We aim to find the companies that will be the “next Apple,” or the “next Google” by diving deep into the trends that will shape the future and finding the lesser known companies that will power them. Arista is one of those companies.
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Thanks for reading, friends.
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