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Arista Networks Inc. (ANET) STOCK | 1/19/21 FRESH LOOK ARISTA NETWORKS GREEN YELLOW RED INC. LIGHT LIGHT LIGHT (TICKER: ANET) LBIR Recommendation Stock Price: $317.07 (1/19/21) Company Size: $22.7B Author: Janice Quek Sector: Communications Company Rank: 162 Industry: Information Technology Equipment Arista Networks Inc is a leading supplier of IT infrastructure hardware and software to cloud service providers and companies to power their datacenters and networks. IN THIS FRESH LOOK WE’LL COVER: u Summary of the Business Arista’s revolutonary hardware architecture combined with its range of proprietary software ä solutions provides a compelling value proposition Grab-and-Go for companies operating in the cloud. THESIS u Recent Developments An investment in Arista is a play on Covid-19, slower industry capacity expansion and demand for modern network 400G delays have led to weak performance in infrastructure equipment driven by H1FY20, but management provided a more enterprise migration to the cloud. upbeat outlook ahead. Arista’s good competitive position, u Competitive Environment healthy pace of innovation and Arista is one of the leading players, but market differentiated product portfolio will share growth appears to have stalled. drive growth for the company and u Conclusions/Recommendations bring opportunities for TAM Arista is showing that business is improving, but expansion. cloud titan demand volatility will continue to be a risk factor until other product categories contribute more meaningfully, likely in a few years. We rate Arista a Yellow Light. SEEKING STOCKS THAT CAN DOUBLE IN 2-3 YEARS 1 LEFTBRAINIR.COM . 630-517-9300 0.94 STOCK: ANET | 1/19/21 FRESH LOOK Data as of 1/19/21 unless specified Enterprise Revenue Fwd $2,298M 22.7B Market Cap: 25.6B Value: (TTM): ($2,222M) Fwd (TTM) 7.18x YTD Return: 9.12% RSI: 66.1 Price/Sales: (11.37x) Gross Margin Revenue Growth 64.08% -4.68% ROIC (TTM): 22.9% (TTM): (FWD, YoY): 200-day 52-Week High: 320.25 52-Week Low 156.63 233.75 Moving Avg. EBITDA 721M CFO 875M FCF 865M Insider Transactions: Insiders sold 868,971 shares in the last three months management. Network developers have thus SUMMARY OF BUSINESS û redesigned hardware to run cloud networks efficiently. A report by market research firm Arista Networks Inc is a leading supplier of IT Global Market Insights expects the global data infrastructure hardware and software to cloud center networking market to grow at a CAGR of service providers and companies to power their 15% between 2018 – 2025, reaching US$45 billion datacenters and networks. The company’s by 2025. Arista estimates that based on its solutions comprise its Extensible Operating current portfolio in the data center and System, or EOS, a set of network applications, Cognitive Campus Network, its current total Ethernet switching and routing platforms, as addressable market is valued at about $22 well as a suite of Campus networking products. billion. Growing work in the cloud drives demand for Comprehensive, versatile hardware managed network solutions by single software layer extensible to all networks The benefits of cloud computing have made it very attractive for companies to operate their Arista’s networking solutions are built for the businesses in the cloud. Cloud computing needs of the cloud, delivering scalability, however, especially on a large scale with availability, programmability, automation and numerous connected devices, demands a visibility. Its products use multiple silicon different network architecture, one in which architectures, which allows it to build more legacy designs are unable to cope with products optimized for different use cases. efficiently. Fundamental structural deficiencies Arista’s portfolio of products is underpinned by of legacy network architectures cause high its Extensible Operating System (EOS), a latency and energy use, and lead to network software that manages the performance of all its outages. Legacy networks are also not routers and switches, unlike legacy vendors programmable, and difficult to integrate with which require multiple management tools that third-party applications for network add complexity and reduce stability. EOS is fully SEEKING STOCKS THAT CAN DOUBLE IN 2-3 YEARS 2 LEFTBRAINIR.COM . 630-517-9300 EQUITY 0.94 STOCK: ANET | 1/19/21 FRESH LOOK programmable and highly modular, and built to manage, secure and provide better visibility with advanced capabilities such as workflow to the network, expanding its total addressable automation and predictive analytics that is market gradually. The company maintains a industry leading. While much of its business is high pace of innovation, constantly upgrading in the datacenter, Arista has also branched out to its hardware and releasing new versions that serve the Campus network with its suite of extends the products’ use cases and Cognitive Campus solutions. It is still in the performance. early stages, but growing rapidly. Arista has also recently been adding and developing software Source: Investor Presentation Financial and Operational Metrics Arista has achieved strong financial and however experienced its growth slowing in H2 operational performance since 2014, the year of its 2019, when management announced weaker IPO. Revenue grew at a CAGR of 32.8% between demand for its products as the industry FY2014 and FY2019. The company is GAAP net consolidated and “absorbed” inventory from prior income profitable and continues to grow EPS years. The Covid-19 pandemic exacerbated the steadily. Gross margin for Arista is comparable to situation, causing sales to slow further. The next its industry, and operating margins are the highest milestone for Arista is mainstream adoption of its in its peer group, remaining steady despite 400G products which the company estimates volatility with its topline. Free cash flow margins would occur in the later half of FY21 and into FY22. are high, averaging 26% over the last 5 years. Arista SEEKING STOCKS THAT CAN DOUBLE IN 2-3 YEARS 3 LEFTBRAINIR.COM . 630-517-9300 EQUITY 0.94 STOCK: ANET | 1/19/21 FRESH LOOK made up another 37%. From a geography LB•LOGIC Facebook and Microsoft are standpoint, Arista saw its European business Arista’s largest customers, making up 23% recovering from Q2 and strength in Asia, but and 17% of FY19 revenue respectively. Any change in demand for Arista’s products rising infection rates, new restrictions and and services unique to these two continued uncertainty of an economic recovery companies will have a major effect on in the U.S. made business activity challenging, Arista’s revenues, as we have seen in FY19. which weakened the region’s performance. 75% of Arista’s revenue today is from the Americas, which led to large revenue growth declines for Arista compared to peers in the switch market. For example, Cisco registered a 0.8% YoY RECENT DEVELOPMENTS decline in Ethernet switches, Huawei saw û revenue rising 18.6%, while HPE declined 2.3% Arista reported improved results in Q3, YoY. delivering sales growth of 12% when compared to Q2 FY20, but a decline of 7.5% on a year-on- year basis. Demand from its cloud titan category drove the improved performance, which continues to be its largest vertical at 37% of total revenue. Enterprise and financials combined Source: Investor Presentation SEEKING STOCKS THAT CAN DOUBLE IN 2-3 YEARS 4 LEFTBRAINIR.COM . 630-517-9300 EQUITY 0.94 STOCK: ANET | 1/19/21 FRESH LOOK software and support renewals. The company LB•LOGIC Although the company is saw a record number of new customer logos in trying to diversify its revenue streams, Q3 from momentum in its enterprise category public cloud service providers (cloud and campus products. While supply chain titans) drive a substantial portion of sales, resulting in volatility and mixed results challenges eased in Q3, shipments were still when compared to industry performance. constrained, suggesting that Arista could have Considering the trajectory of Ethernet sold more during the quarter without these switch spending in the next few years in the industry where public cloud providers problems. will continue to contribute a large proportion of demand, we believe the Arista reported gross margin of 64.6% in Q3, volatility will continue, albeit less than within its guided range of 63% to 65%. Non- before due to its expansion initiatives in other product areas and launch of SaaS GAAP operating income was $231.5 million, or services (see Product Development a margin of 38.2%, while non-GAAP net income section). was $192 million, a decrease from $217.1 million in Q3 FY19. It generated $215 million in operating cash flows. During the quarter, the Financial and Operating Results company also repurchased $167.3 million of shares as part of its three-year plan to purchase Arista announced revenue of $605.4 million, a $1 billion of shares, leaving $339 million 7.5% YoY decline when compared to Q3 FY19. remaining in its repurchase plan. Product (hardware) sales were 79% of total sales in the quarter, with the remainder on services, Source: Investor Presentation SEEKING STOCKS THAT CAN DOUBLE IN 2-3 YEARS 5 LEFTBRAINIR.COM . 630-517-9300 EQUITY 0.94 STOCK: ANET | 1/19/21 FRESH LOOK resolution of its supply chain constraints. New additions to its network software and services, LB•LOGIC Despite quarterly fluctuations some of which are based on subscription with its sales performance, Arista has been able to maintain steady margins – an models, are expected to also expand revenue indication of good financial discipline and opportunities and bring stability to revenue execution. performance. Within this context, Arista guided for revenue Product Development and Company Expansion to be between $615 and $635 million in Q4, or growth of 13.1% YoY. Non-GAAP gross margin Arista announced its acquisition of Aware is projected at 63% to 65%, remaining consistent Security, a Network Detection and Response with other quarters, while non-GAAP operating (NDR) platform technology firm that leverages margin is expected at 37%, which includes artificial intelligence and human expertise to continuing investments in R&D to support perform advanced threat hunting.
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