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Why Is Arista Networks (ANET) Up 9.4% Since Last Earnings Report?

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It has been about a month since the last earnings report for Arista Networks (ANET). Shares have added about 9.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Arista Networks due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Arista Q3 Earnings & Revenues Top Estimates, Down Y/Y

Arista reported decent third-quarter 2020 results, wherein the top and the bottom lines beat the respective Zacks Consensus Estimate. However, both figures declined on a year-over-year basis.

Net Income

On a GAAP basis, net income in the September quarter declined to $168.4 million or $2.12 per share from $208.8 million or $2.59 per share in the prior-year quarter, primarily caused by lower operating income.

Non-GAAP net income came in at $192 million or $2.42 per share compared with $217.1 million or $2.69 per share in the year-ago quarter. The bottom line, however, beat the Zacks Consensus Estimate by 19 cents, delivering a positive surprise of 8.5%.

Revenues

Quarterly total revenues declined 7.5% year over year to $605.4 million (but surpassed the company’s guidance of $570-$590 million). This was due to extended lead times and shipment constraints resulting from the COVID-19 operating environment. The top line, however, surpassed the consensus estimate of $580 million.

Arista generated 75% of total revenues from the Americas and the remainder from international operations. Almost 37% of the vertical mix was driven by cloud titans, 37% from enterprise and financials, and 26% from cloud service providers. Product revenues declined to $480.2 million from $555.1 million year over year, while Service revenues grew to $125.2 million from $99.3 million supported by renewals and subscriptions.

Other Details

Non-GAAP gross profit contracted to $390.9 million from $421.2 million, with the respective margins of 64.6% and 64.4%. The non-GAAP gross margin was above the midpoint of the company’s guidance of 63-65%, reflecting the software and services mix.

Total operating expenses were $196.6 million compared with $188.7 million in the prior-year quarter. The company recognized incremental COVID-19-related costs, including elevated freight and component costs. Non-GAAP operating income declined to $231.5 million from $258.2 million in the year-ago quarter with a margin of 38.2% and 39.4%, respectively.

Cash Flow & Liquidity

In the first nine months of 2020, Arista generated $548.2 million of net cash from operating activities compared with $635.9 million in the prior-year period. As of Sep 30, the cloud networking company had $970.3 million in cash and cash equivalents with $247.7 million of non-current deferred tax liabilities.

Q4 Outlook

For the fourth quarter of 2020, Arista expects revenues of $615-$635 million. It anticipates a non-GAAP gross margin of 63-65% and a non-GAAP operating margin of around 37%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

Currently, Arista Networks has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Arista Networks has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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