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There was no significant insider buying for ANET.

 WHY WE RATE ARISTA NETWORKS A BUY The benefits of cloud computing have encouraged more organizations to Grab-and-Go THESIS migrate or start their business in the cloud. Cloud computing, however, requires a network architecture redesign that is built for the cloud, which An investment in Arista is a play has created demand for new types of networking hardware and software. on demand for modern network infrastructure and equipment driven Arista, a developer of networking solutions, switches and routers for the by enterprise migration to the datacenter and campus, stands to benefit from this growth opportunity. cloud. Arista’s leading market Furthermore, Arista has the following attributes that would drive strong position and differentiated product portfolio will sustain its strong growth in the medium term: growth momentum and bring 1. It is one of the three vendors in the market, and is slowly opportunities for TAM expansion. gaining market share against current market leader Cisco Systems. 2. Arista’s products are differentiated in performance, scalability and versatility. Extensive experience serving high performance companies gives it credibility. 3. There is room for further TAM expansion as the company develops hardware for new verticals and other parts of the network.

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4. The company is a major player in the North America region, but there is much room for international expansion as it invests more in other regions.

 SUMMARY OF THE BUSINESS AND THE INDUSTRY  Business

Grab-and-Go TALKING POINTS

What we like… What we don’t like… Arista Networks Inc is a leading Strong enterprise cloud Arista’s revenue performance supplier of cloud networking migration momentum is sensitive to the order rates of solutions that use software creating demand for high certain key customers. innovations to address the needs of performing networking Companies in its “Cloud large scale internet companies, cloud equipment and solutions. Titans” category can cause service providers and next-generation swings in growth results. data centers and campuses for Revenue can be “lumpy”. enterprise support. The company’s Wide and deep portfolio of solutions comprise its Extensible high quality products. Arista Operating System, or EOS, a set of has established a positive network applications and Ethernet reputation in the business. switching and routing platforms. Arista’s end customers span a range of Team is highly innovative, industries, and include large Internet launching new products for companies, financial services new sections of the market at a organizations, government agencies, fast pace. TAM expansion is media and entertainment companies. highly likely. Arista has performed above current industry metrics in a number of areas.

Strong momentum in migration to the cloud

The benefits of cloud computing have made it very attractive for companies to operate their businesses in the cloud. Many young companies start in the cloud, and migration to the cloud is well underway for many mid to large enterprises. Cloud computing, however, especially on a large scale with numerous connected devices, demands a different network architecture, one in which legacy designs are unable to cope efficiently. These legacy networks are limited in performance, and latency and energy use increases substantially as more applications and devices are added. Network outages are common and the economic

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impact to companies costly when they occur. These traditional networks have attempted to evolve to address emerging cloud computing requirements, but fundamental structural deficiencies of the network architecture limit the ability of these networks to deliver the required performance consistently and reliably. Legacy networks are also not programmable, and difficult to integrate with third-party applications for network management. As a result, network developers have created entirely new architectures that are built for the scalability and high-speed performance of the cloud. Cloud service providers and companies that desire to have their own data centers for internal use, typically large organizations, will require a network platform built on these new network architectures, which is driving demand in data center network equipment, such as switches, routers and network management software. According to technology market research firm Gartner, public cloud services will grow in the mid to high teens in the next four years. The public cloud computing market is currently estimated at $178 billion, making the growth opportunity for the data center networking equipment market a large one with a fairly long runway.

Market growth forecast for public cloud services worldwide from 2011 – 2022 (Source: Statista)

Arista’s product design differentiation drives demand from high performance companies

Arista’s networking solutions are built for the needs of the cloud, delivering scalability, availability, programmability, automation and visibility. Its products use multiple silicon architectures, which allows it to build more products optimized for different functions in the network compared to competitors that use fewer silicon architectures. As a result, Arista has been able to offer a deep and wide portfolio of hardware switches that support third-party automation tools – one of the company’s key strengths. Arista’s portfolio of hardware products is underpinned by its Extensible Operating System (EOS), a software that manages the performance of all of its routing and switching platforms for multiple use cases, unlike legacy vendors which require multiple management tools that add complexity and reduce stability. EOS is fully programmable and highly modular, and built with advanced capabilities such as workflow automation and predictive analytics that is industry leading. It is the versatility of its hardware and software that

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enables Arista to add products to serve new verticals, expanding its total addressable market over the years. A recent Gartner report also praises Arista for having extensive experience in powering high-performance and large-scale networks such as cloud providers and financial services companies. This experience gives Arista further credibility in the high quality and performance of its products.

Robust operational and financial growth metrics

Arista has achieved a strong financial and operational performance since 2014, the year of its IPO. Revenue grew at a CAGR of 38.5% between FY2014 and FY2018. The company is GAAP net income profitable and continues to grow EPS steadily. Gross margin for Arista is comparable to its industry, and operating margins are the highest in its peer group. Arista’s operations have generated a positive free cash flow margin, in line with its industry, and sufficient to sustain its growth without having to take on more debt. In terms of operational metrics, Arista’s customers have grown from about 3,000 at the end of FY2014 to 5,500 at the end of FY2018, growing at an average rate of 16% each year. Average revenue per customer has also increased from $0.195 million to $0.391 million, more than doubling in the span of 4 years. Arista however encountered a speed bump in Q1 2019, when management announced weaker than projected revenue as two of its major customers decided to pull back on spending as they consolidated inventory. We assessed this to be a temporary occurrence rather than any indication of an industry spending slowdown.

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Metric Industry1 Arista Gross Margin 65.1% 63.8% EBIT Margin (NTM) 20.4% 32.3% Free Cash Flow Margin 20.2% 20% LT Debt to Equity Ratio 55.1% 0% R&D Expenses as % of Sales 18.1% 20.6% ROE 17.3% 18% ROIC 15.8% 18%

 Outlook/Estimates

The outlook for Arista is positive as enterprise cloud migration is well underway and demand for networking equipment is strong. The company has an array of switches to capture each stage of the refresh cycle, and is already ready for the next stage of the 400Gb Ethernet switch cycle when it ramps in 2020. Arista’s previous long court battle with Cisco for patent infringement has also concluded with Arista

1 Industry comprise key comparable companies Cisco Systems, Juniper Networks, Extreme Networks and F5 Networks.

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paying $400 million in compensation to Cisco. Hence this has lowered further costly legal exposures to investors.

Arista has historically grown well above industry expansion rates, which is estimated at a growth rate of 10% in the medium term. Hence, in the next 3-5 years, Arista’s revenue is likely to grow at rates between 15-25%. Operating at greater scale, Arista’s profitability is also expected to improve, growing EPS and free cash flow for shareholders. In the nearer term, Arista’s revenue growth is projected to dip to the high teens, negatively impacted by the unexpected scale back in orders from its key customers in Q1.  Industry/Competition

Arista operates in a highly competitive industry as demand for ethernet switches and routers grow due to enterprise cloud migration. Major players in this industry include Hewlett Packard Enterprise, Cisco Systems, Microsoft Corporation and Juniper Networks. Many players are investing heavily in R&D or acquire technology companies in order to increase their lead, and expand their product portfolio. White box vendors such as Quanta, Celestica and Accton are also active in the market.

Much of the worldwide spend in the Ethernet switch market came from the North American region, although the China region registered the highest growth. IDC’s latest quarterly ethernet switch market report showed that the Chinese market grew 11.7% YoY in Q1 2019, while Taiwan grew 15.3% YoY. In contrast, the United States grew 11.9% YoY. Notable Chinese vendors include Huawei, H3C and Ruijie.

The industry is in the midst of a 100Gb Ethernet switch upgrade as revenue for this particular switch port grows rapidly from adoption by hyperscale cloud providers and large enterprises. Market research firm Dell’Oro Group expects ongoing strength in the 100Gb switch market through 2019 before the 400Gb Ethernet switch refreshes materializes in 2020 and beyond.

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In terms of market share, IDC’s latest Q1 2019 report estimates that Cisco Systems currently controls the largest market share at 40%, followed by Huawei at 8.9%, Arista at 7.5%, HPE at 5.3% and Juniper at 2.6%. Amongst this group of market leaders, HPE and Juniper were losing market share. Cisco System’s lead comes from its high visibility, a large and loyal installed base and deep global sales channels and coverage, according to a Gartner industry report. This report also regarded the company’s “broad portfolio of hardware switches and wide variety of form factors, interfaces and performance characteristics” as one of its strengths. While Cisco dominates the market currently, Arista and some of the leading companies are gaining share.

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 Total Addressable Market (TAM)

A report by market research firm Transparency Market Research expects that the global data center networking market to grow at a CAGR of 15.5% between 2017 – 2025, reaching US$228 billion by 2025. The

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ethernet switch market, a subset of the data center networking market, grew 9.1% YoY in 2018 to about $28.1 billion, according to a report by International Data Corporation (IDC). Arista estimates, based on its current product portfolio and expansion direction, that its TAM is about $20 billion, but will grow to $30 billion by 2022.

 Quality of Product/Service

Arista Networks ranks favorably among independent technology market research firms. The company has been placed in the Leaders Quadrant of Gartner’s Magic Quadrant for Data Center Networking for the 5th consecutive year in 2019, and a Leader in Forrester’s Wave: Hardware Platforms for Software-Defined Networking (SDN). Gartner reports that one of Arista’s numerous strengths is its extensive portfolio of switches, focus on automation and high performance operational capabilities. Arista’s team is also highly innovative, launching new products for new sections of the market at a fast pace.

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Gartner’s Magic Quadrant for Data Center Networking 2019

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. Forrester Wave: Hardware platforms for SDN  COMPANY MANAGEMENT  Founder/History

Arista was founded by Andy Bechtolsheim, David Cheriton and Kenneth Duda in 2004. The three men were able to fund the company themselves. Prior to Arista, Bechtolsheim had co-founded Sun Microsystems in 1982 and became its chief hardware designer. Cheriton co-founded Granite Systems, a company that developed Gigabit Ethernet products, in 1995 together with Bechtolsheim. Duda was hired as Granite’s first employee. Cheriton and Bechtolsheim later founded another company, Kealia, in 2001. Between 1996 and 2003, all three men held executive positions at Cisco, before leaving the company to start Arista Networks. Arista became a public company in June 2014, trading at the NYSE under the symbol “ANET”. The company completed its first acquisition of Mojo Networks in August 2018 for an undisclosed amount. Mojo Networks enables Arista to provide secure, high-performance cognitive WiFi at cloud scale to enhance its new cognitive cloud networking offering, a solution that addresses transitional changes as enterprises move to Internet of Things (IoT) ready campuses.

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Arista was first incorporated in California as Arastra Inc. in October 2004. In March 2008, the company was reincorporated in Nevada before changing its name to Arista Networks in October of the same year. Arista was later reincorporated in Delaware in March 2014. The company is headquartered in Santa Clara, California and has offices in San Francisco, Vancouver, Bangalore, Singapore and Ireland. It currently has about 2,300 full-time employees.

Andy Bechtolsheim is one of Arista’s founders and has served as its Chairman since 2004 and as its Chief Development Officer since 2008. As Chairman and Chief Development Officer, he is responsible for the overall product development and technical direction of Arista Networks. After starting Arista, Bechtolsheim returned to serve as senior vice president and chief systems architect at Sun Microsystems, a company that he also founded. He has an M.S. degree in Computer Engineering from Carnegie Mellon University and was also a Ph.D. Student in Electrical Engineering and Computer Science at Stanford University from 1977 to 1982.

David Cheriton is one of Arista’s co-founders. He is a computer science professor at Stanford University, with a focus on distributed systems and networking, and one of Google’s early investors. Cheriton is also a philanthropist, donating millions of dollars to education to his former universities University of Waterloo and University of British Columbia, as well as Stanford University. Cheriton resigned from Arista’s board in March 2014, and has no continuing role with Arista. He still owns about 10% of Arista’s stock through a trust for his children. Cheriton has a PhD and Masters from the University of Waterloo, and a Bachelor degree from the University of British Columbia.

Kenneth Duda is also one of Arista’s founders and has served in various roles. Duda has served as Arista’s Chief Technology Officer and Senior Vice President of Software Engineering since September 2011. From April 1999 to October 2004, Duda was chief technology officer of There, Inc., a virtual worlds company. From September 1996 to April 1999, he was leading the software development of the switch kernel for the Gigabit System Business Unit with Cisco Systems, Inc. Duda holds B.S. and M.S. degrees in Computer Science and Electrical Engineering from the Massachusetts Institute of Technology and a Ph.D. degree in Computer Science from Stanford University.  Current Management

Jayshree Ullal is Arista Network’s CEO. Ita Brennan is its Chief Financial Officer (CFO), and Kenneth Duda is its CTO. Background information of these three executives was taken from the company’s website and annual report, summarized below.

Jayshree Ullal is the current CEO of Arista Networks. She is also its President and a member of its board of directors since October 2008. From September 1993 to May 2008, Ullal served in various positions at Cisco Systems, Inc., with her last position as senior vice president of data center, switching and services group.

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Prior to that, Ullal was a vice president of marketing at Crescendo Communications, Inc., Cisco’s first acquisition in 1993. She has also held various product and engineering positions at Ungermann-Bass, Advanced Micro Devices, Inc. and Fairchild Semiconductor. Ms. Ullal holds a B.S. degree in Engineering (Electrical) from San Francisco State University and an M.S. degree in Engineering Management from Santa Clara University.

Ita Brennan joined Arista Networks, Inc. in May 2015 as Senior Vice President and Chief Financial Officer. From February 2014 to May 2015, Ms. Brennan served as chief financial officer of a stealth start up firm in the energy sector. Prior to that, Brennan held various roles (including Chief Financial Officer) at Infinera Corporation and Maxtor Corporation. Ms. Brennan has also been a member of the board of directors of LogMeIn, Inc. since November 2018. She is a fellow of the Institute of Chartered Accountants and a public accounting alumna of Deloitte and Touche, having worked at the firm in both Ireland and the U.S.

Kenneth Duda is Arista’s Chief Technology Officer. A write-up of Duda follows in the preceding paragraph.  Capital Allocation (M&A, buybacks, expansion)

Arista Networks has no long-term debt. The company does not issue dividends and has not repurchased any shares.

Operating Margins Operating Margins R&D Expenses as % of Sales Arista Networks 32.3% 20.6%

Extreme Networks 0.73% 18.7%

Juniper Networks 12.8% 21.6% Cisco Systems 27.6% 12.8% F5 Networks 28.5% 16.9%

LB LOGIC: Despite not issuing debt to fund company expansion and growth, Arista has still been able to manage a company acquisition (Mojo Networks) with its own cash, achieve comparable R&D expenditure relative to industry peers, one of the highest revenue growth rates, and the highest operating margin. This is a testament to the company’s strong execution, product quality and highly efficient use of its resources.  Insider Transactions

There have been no large unusual share purchases by insiders recently.

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Source: Nasdaq  TREND ANALYSIS

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Arista trades at a significant premium to the rest of its peer group, although this is not unreasonable given its market position, steady market share gain and growth momentum. The company’s valuation is currently in the middle of its 1-yr historical range. Hence there is potential for multiple expansion if revenue and earnings growth accelerates or if Arista’s TAM expands.  Comparative Metrics Revenue Revenue Gross Margin Growth Forecast Forward P/E Forward P/S (%) Forecast (%) (Millions USD)

Arista Networks (ANET) 18.90% 2557 63.8% 29.80 8.24

Extreme Networks (EXTR) 0.50% 988.2 54.3% 21.73 0.86

Juniper Networks (JNPR) -3.87% 4468 59.2% 14.64 2.09 F5 Networks (FFIV) 2.87% 2224 83.5% 14.05 4.01

Cisco Systems (CSCO) 5.10% 51847 63.3% 20.00 4.72

 FINANCIAL STATUS (QUANTITATIVE METRICS)  Recent Price Action

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Share Price Movement

$350.00 200 days MAVG

$320.00 $276.35 $290.00

$260.00 $267.55 $230.00

$200.00

$170.00 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19

Arista’s stock has seen significant volatility in the last year due to broader market movements. The company’s stock also dipped after its Q1 2019 earnings call when Arista announced weaker than expected results. Total return on the stock in the past year is 6.89% while total return YTD is 36.38%.

In earnings, analysts have downgraded EPS estimates from $10.80 per share three months ago to $10.54 per share. Arista’s current rank in Jarvis is 185. Its price-vs-20-day average is 1.077, and RSI is 61.9, suggesting that the stock is approaching an overbought condition. Short interest is 3.3%.

 The Last Downturn

Arista was a very young company during the downturn and only became a public company in 2014. Hence little meaningful information is available about its performance during the last recession.  QUALITATIVE INFORMATION  Special/Unique Characteristics of the Company

Arista’s strengths comprise its wide portfolio of switches and uses multiple silicon architectures in its products, giving it added versatility and facility to add to its product portfolio quickly, and expand its addressable market. Arista’s technology is also patented, giving it a competitive edge and increasing barriers to entry.  Catalysts

Arista has been expanding its portfolio of switch offerings, serving new industries whenever possible. An addition to its current set of solutions through internal R&D or acquisition that enables Arista to serve new markets would drive the stock price upwards. Improved performance and better than anticipated earnings

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or revenue growth would also appreciate the stock price. Another catalyst for the stock would be product quality or performance problems with competitors’ products, especially for its key competitor Cisco Systems, that would change competitive dynamics in Arista’s favor.  RISKS TO THE BUSINESS The industry is highly competitive, and larger companies like Cisco Systems could afford to lower its prices to beat Arista out of the competition from their greater economies of scale. Arista’s CloudVision is known to be expensive, which could be cost prohibitive to user adoption. Expansion of Arista’s business outside of the data center into campus could dilute its focus, thinning out resources to maintain its product edge in the data center.

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 VISUAL REPRESENTATION OF CAPITAL STRUCTURE

Percentage of Enterprise Value

102% $21,664 Million Common Equity

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 GLOSSARY EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of a company’s operating performance, which allows the investor to analyze the earning power of an enterprise without having to consider financing or accounting decisions or tax environments.

EV/EBITDA: A valuation metric intended to describe the total amount an acquirer would have to pay to purchase a company (incorporating the cost of assumed debt) per dollar of EBITDA.

Fwd: Shorthand for Forward. Generally means “Next Twelve Months.”

Market Cap: Market Capitalization. Calculated by multiplying stock price by number of outstanding shares.

ROA: Return on Assets. A measure of financial performance that shows the percentage of profit that a company earns in relation to all of its available resources (both debt and equity). Calculated by dividing Net Income by Average Total Assets.

ROE: Return on Equity. A measure of financial performance that shows the percentage of profit that a company earns for each dollar of shareholder equity. Calculated by dividing Net Income by Average Shareholder Equity.

ROIC: Return on Invested Capital. A measure of financial performance intended to evaluate a company’s growth and measure how efficiently a company is using investor funds to generate income. An ROIC of 2% or more in excess of a company’s cost of capital defines a value creator. Calculated by dividing after-tax Operating Income by the book value of all Invested Capital.

TTM: Shorthand for “Trailing Twelve Months”.

YTM: Shorthand for “Yield to Maturity”. YTM is the total return expected if an investor holds a bond to maturity, with the assumption that all coupon and interest payments are made on schedule.

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